Can apple really take my iPhone away?

Long story short my husband bought a 340$ paperweight off of some shady people on offer up, when a Sim card is inserted it says no service. A nice guy at our carriers local store said to go to the apple store and get it exchanged for credit. Even better the phone is under warranty so we can exchange it. However we hit a bump when the apple "genius" said we can't exchange the phone right away because our particular phone got flagged to go to the "depot" they couldn't tell us why. At some point the guy said if they used 3rd party parts they're going to keep the phone and they do this as a deterrent. Can they really just take peoples property like that? There's confusion about this just because I asked again and he said something different, I couldn't get clear answers. At the least my spouse has learned a 340$ lesson in listening to one's gut, and at most it might work out and he gets a nice phone. I just can't believe that's legal.

Right a fair bit to deal with here!

If the phone has been fixed with replacement parts then the warrantee is void and Apple is under no obligation to do anything to fix it!
The Apple "genius" can't just keep your phone, bizzarely if he does then he is committing theft! The more likely reason that your phone was flagged would be that it had been previously stolen. However if that were the case then the Apple employee should have called the police. This rather works in your favour, because to prove anything in regards to the phone the Apple store would have to produce that very phone to law enforcement. If you have a receipt - you do have a receipt don't you! - then you can produce this to the police and inform them of what happened - provided you are sure of the phones origins - of course this goes pear shaped if the store can produce the phone and prove that you were handling stolen property!

They've told you that's what they'll do so then can do it.

Contact the headquarters and get the correct info from them

Apple really hate other people trying to do stuff to their phone. They don't let people acess criminals phones and they made updates which broke your phone if you didn't go to apple for a button fix

No, Apple can't keep your phone-that is theft, no matter what the circumstances, even if the phone is stolen. They can refuse to fix it, though, and they can call the police if the phone is flagged as stolen.

Apple really hate other people trying to do stuff to their phone. They don't let people acess criminals phones and they made updates which broke your phone if you didn't go to apple for a button fix

Apple sucks and is stupid asf. I wouldn't even bother with them.