It was a Gizmodo editor who paid $5,000 to buy the prototype after he basically knew it was stolen property. Apple reported it and the police got a warrant because knowingly buying stolen property for $5,000 is indeed a crime.

Gizmodo also got in contact with Apple and said they'd only return the phone (which they knew was stolen at that point) if Apple agreed to a list of terms. If you withhold someone's stolen property and refuse to give it back until they cave to your demands, the law is going to get involved. Again the warrant/seizure was overkill, but Gizmodo was doing some stupid stuff.

There were a lot of sketchy details about how the original guy got the phone. IIRC he tried to claim it was a mistake and that he tried to return it once he realized he grabbed the wrong phone, but he also made no effort to actually get it back to the bar. The panicked Apple engineer was calling the bar frantically to get it back. If he had made any effort at all to return the phone instead of selling it, it would have gone right back to the engineer.

The Gizmodo reporting also had other controversies. They were milking the situation for all they could, including basically identifying the poor Apple engineer who lost the phone. Really not cool. A lot of people hated Gizmodo for the way they treated the Apple engineer while they were trying to milk that story.

EDIT: Found it https://gizmodo.com/how-apple-lost-the-iphone-4-5520438

Notice how they open with the Apple engineer's name and personal info. They tell a story that tries to make the person who had the phone sound innocent, but it also involves him going through the Facebook account on the phone and then taking it home instead of giving it to the bar staff.

Then no details about how suddenly Gizmodo came to possess it for $5,000