Sorry, but you said that the card which had a suspicious activity flag on it was your only source of funds.
Then you said you ran to the ATM and withdrew money ... which, regardless, requires you to use your bank card and pin. So how did you manage to use your card to withdraw at an ATM when the card, which was your only source of funds, was suspended due to a fraud flag?
Was there a gap of a day or so while this was sorted between you or the bank, because the way you've written that just makes the whole thing sound like nonsense.
This does happen where the bank freezes debit card transactions due to possible fraud use but you can still take money from the ATM.
I had this happen to me when i moved into my flat as i went from spending £800 a month to spending £1200 a month. The first i knew about it was when i went to buy my food shopping any my card was declined so i did the same went and got cash from the ATM and payed for it with cash. I did this for 2 weeks before i got round to calling the bank and saying WTF.
As for the iPhone for free issue. I would say dont spend anything on that card as they will relaise the mistake and pull the balance of it soon. I know banks do this if they make a mistaken deposit and you spend it you will find yourself out of pocket. But if you report it and it is not rectifyed within X days then i believe the money is yours.