Remain pleasant and professional, even if the reference upsets you. An employee's off premise activites have no place in a reference, unless they were part of a special arrangement. If you are working for a large corporation, you are probably enjoined from giving references. If it is, there may be repercussions. There are times when you may be able to refer an inquirer to someone at a higher level, whose position permits more freedom.
Some firms allow candidates to sign disclaimers for specific situations.
People who have worked for you, really do deserve to be acknowledged for their performance. People who have performed well, although they may have been ill suited for the situation in which they functioned, should be recognized for trying. There are and will continue to be poor employees who use the referencing climate to slip from one job to another. You are not obligated to save a future employer from these people, but neither are you obligated to put them in a good light. Rarely will a candidate terminated for dishonesty, substance abuse or other seriously unprofessional behavior be able to show a strong track record in his field.