You have a right to be more than annoyed. People should not be saying anything around the students, much less THAT.

I had something similar happen and with hindsight I would have said something. (I went back and discovered my assistant-from-hell had told everyone that I had been in psych the whole time I was off and was psychotic. I was not psychotic and the only time I was in the hospital was in the ER because I had a horrible reaction to Abilify and had to get checked out.) I did not realize the depth of the rumor until bad things happened and I did not confront her and I only told my supervisors about it months later when they were asked to remove me from a building where I thought things were fine and I was being called "crazy" behind my back.

I should have said something then. I was too afraid of stirring up trouble and instead I just got hurt. Several years later I interviewed for a job and she was the manager at the site. I sent a letter withdrawing my application because I felt unable to supervise her based on past interactions and I hoped that was enough to at least raise questions with her new employers.

Maybe it's ok to smoke until school is out?