Can a university be sued for defamation of character? Can a university lie to the police about me?

I operate a small business dealing with horses. Last Winter I crossed paths with a customer of mine that goes to a local university. For some reason this young woman thought I followed her. She brought her concern to the university. Without looking into it, the director of the department contacted police services. When contacting the police the story was greatly embellished. In the police report there are statements made by the director that are blatant lies. Can a university say things about me they know to be untrue? Can they spread this rumor or do they need to fact check first? It seems the director is very maliciously trying to destroy my business. Young female clients are a huge part of my business. The ripple effect of this issue has had a huge effect on my reputation.