I think you're making a lot of assumptions here. Firstly, that she's a flamboyant bitch (she's not -- in fact, she has never even mentioned this kind of thing until I asked her). Furthermore, by assuming she's a "flamboyant bitch" at all, you've demonstrated that you're part of the problem and blaming the victim. Can't you see that?
Second, you're making the assumption that if you're sitting directly across from a woman, you have to either look at her or keep your eyes closed. There are a million other things in the room you can look at that don't involve her breasts. There's a fine line between staring intently at her eyes and making casual eye contact while carrying on a conversation. I'm capable of not staring at her breasts and making women feel comfortable around me -- and so are millions of other men. It's not hard, but it is something we men should be aware of.
Third, you're right. I do believe her when she says that people stare at her breasts (hell, I've checked them out myself) and that it makes her uncomfortable when she notices. I don't see any reason to disbelieve her. You say that women have brushed your arms and grabbed your ass -- why should I not take you at your word? It seems like something that could totally happen. How would you feel if I said to you "Ha, no woman has ever grabbed your ass. Quit being a drama queen"? That's effectively what you just said about my coworker. I don't have any evidence that shows she's a liar -- and neither do you, by the way -- but I have plenty of evidence that what she says is true from her perspective.
You're right about another thing: my responsibility as a manager is to listen to everything and make good judgment calls. I'm not clear on where you think I'm making poor judgment calls. I have literally done nothing but listen to my coworker's thoughts (which I assume falls under the definition of "everything") and have asked for opinions regarding her statement. I haven't taken any action, I haven't fired anyone, I haven't accused anyone of improper behavior. Where is my poor judgment?
Nowhere. I haven't made any poor judgments. If anything, actually stopping to think about her comment and the ramifications is a sign of progress, that the status quo can be improved.
I'm sorry you've experienced sexual harassment. It's a terrible thing to feel uncomfortable going to your work. I don't know what I would do in your situation, but I owe it to myself and to my team to consider what I might do if it happened to me. Don't you agree? Or do you think I should just sweep it under the rug and ignore it?
P.S. I said nothing about culture and diversity or the race/ethnicity of my friend. I'm not sure where that came from. But I don't disagree with you. It's hard to mix cultures. But surely we can try to ensure that everyone is on their best behavior, yes?