How to unlock stolen iphone?

My friend owed me money and couldnt pay me back so she gave me her iphone (4) to sell. She then screwed me over by reporting it stolen. So when i tried to sell it to someone i met from kijiji he walked into the apple store and i guess that triggered it to lock and say "this phone has been lost.call this number" when it was working fine UNTIL he walked into the apple store. So i'm not gonna be able to get her to undo that. I tried doing the recovery mode reset and it did nothing.i'd really rather not pay a lot of money to get it unlocked and also risk some company calling the police because the phone is saying it is stolen and no one wants to buy a locked phone. What can i do?

Added (1). It could be a lie, but it could be a crappy friend. It's reported stolen, but it is not actually stolen. She gave it to me.needless to say she is not my friend anymore because of this.i'm not happy about the situation but i like to rather than dwell on what i can't change, try to change what i can. So just help me instead of being accusational

Added (2). It could be a lie, but it could be a crappy friend. It's reported stolen, but it is not actually stolen. She gave it to me.needless to say she is not my friend anymore because of this.i'm not happy about the situation but i like to rather than dwell on what i can't change, try to change what i can. So just help me instead of being accusational

You are generous with the term "friend." Was her iPhone on contract? If it was this makes no sense because she will have to pay the phone company an early termination fee. If it wasn't on contract, she should have sold the phone herself. The fact that this isn't what happened makes me suspicious.

You do realize that this is illegal now of recent, and you could go to jail?

Well give it back to her… And your story sounds like a lie…

Once a phone is reported stolen they "blacklist" the phone, cutting service to that phone, making it useless on that phone carriers network. Some carriers share their "blacklist" phones serial numbers too.

So there is not a lot you can do, good luck.