IPhone blacklisted but its not stolen?

My friend had an AT&T iPhone 4 for about two weeks and then sold it to me. It worked perfectly fine while she used it, she was actually using it when she sold it to me. She took the SIM card out, and reset the phone. Almost immediately I put my SIM card in, network popped up but now my data isn't working. Checked imei and is now saying its reported lost or stolen? I know she didn't report it, and I know it's not stolen because she was using it, it was her phone. If the phone was still under her contract, would me putting my SIM card in it caused it to set off a red flag in AT&T's system? And that's why it is not working? Please any advice on this would be helpful.

If your friend's phone was under contract, and your friend doesn't keep paying the bill, AT&T will blacklist the phone also.

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