Well on the one hand you could do things the proper way, by going to your friend and explaining to him that you don't appreciate being talked about in this way, and that while you value your friendship you would ask him not to associated you with this paticular activity. Then you would do well to let everyone who you talk to that you are not involved in anyway, citing to talk with your friend whom by now you have sorted everything out with (hopefully) in order to clarify your story.

Then again you could do what I would do, which would be to beat the snuff out of the lying little toad for wasting your time and your reputation, then swipe his hash, work it into the circulator at some old folks home, then take the evidence down the police station for kicks.