Sold my AT&T Samsung smartphone. Buyer is pulling a fast one on me through eBay

Hi everyone. I recently sold a smartphone here on eBay. The buyer paid promptly, I received $400 after all the fees were paid. I shipped the pricey AT&T Samsung smartphone to the buyer. Here is the timeline:

3/22 Saturday: Smartphon is delivered to buyer.
3/26 Wednesday: Buyer sends me a message indicating that he can not use the smartphone because someone reported it "lost" and is now "blacklisted" wtih AT&T. So the phone is now dead. 

I apologize to the buyer and told him there must be some sort of mistake. I purchased the AT&T smartphone myself diretly from AT&Tand have the receipt to prove it. I told him to send it back and would gladly provide a refund for this discrepancy.  The phone was purchased outright too.  It was still new in the box and was never activated on my account.  

4/1: Tuesday: I received the AT&T smartphone from buyer.
Opened the box and it reeks of cigarette or a strong tobacco odor. Everything, the usb cable, battery, user manual just stinks of cigarette smoke. I immediately take the smartphone to my local AT&T corporate store( extrremely embarrased because the phone smells horrendous) I walk up to the manager and tell him you guys sold me "blacklisted" phone. The manager takes the phone and gives me this look of disgust, like dude how many packs of cigarettes to do you smoke a day. I apologize to him for the horrible odor, and he commences to punch in the IMEI serial number into his computer to investigate what occurred. He sees something strange and then calls Asurion (the insurance company) to verify additional details. After about 25 minutes he tells me that someone did file a insurance claim on the phone, but I was not the that person. The insurance claim for a lost/stolen phone was filed on 3/ 25 Tuesday in another state. 

So the buyer used the phone for a day or two and then filed and insurance claim and reported the phone stolen. He paid his deductible and then gets a replacement phone from Asurion. Sends back the "lost" phone to me asking for a full refund plus the return shipping cost. My goodness, doesnt anyone have any morals now days??? How do you recommend I handle this issue. He has filed a not as described case withe eBay and is asking for his money back. I apprecaite all your comments or advise. Sorry for the long post.