Scammer. You will likely never see the phone again and ebay would love to take your money as well. Maintain open contact with the buyer, provide links to apple websites for instructions pertaining to their problem. Sometimes it is honestly just a lack of knowledge that can be easily fixed with some instruction. In the meantime, Get on the horn with ebay immediately, let them know what is going on, assuming you can, also let them know that it was a verified functional phone and that you suspect a scam. As long as you know the phone was 100% functional, do not let anyone introduce ANY doubt about the phones functionality. This is like court, maintain that the phone was and is perfectly fine. You may still have to accept the return, if you do not get back YOUR phone back, in 100% the same condition, contact ebay immediately again, let them know what is going on, request that they reverse any fees or charges that have been refunded to the buyer so you do not lose out. There is no reason for ebay to let a good seller to take a hit for their poor policies. This coming from a ebay seller of 10 years that continues to sell on ebay.
In addition, full insurance coverage for the value of the phone+shipping+any other costs incurred from your shipper... is a wise idea. At least for valuable, fragile equipment.