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How to get out of contract with a Iphone ?

I purchased a iphone 4 in August of 2011 in September I told them it was lost but I had no insurance on it so in December I was going to pay the disconnection fee of $350 and they suggested I switch it to a basic line because that whole time I was still paying for $50 for the data package. I find out someone has activated the Iphone and am being accused of lieing and today I was told how people report there Iphone's lost or stolden because they cant afford it so they have it switched to a basic phone. Now they are saying I never reported it but why would they have let me switch to a basic phone if I had not reported it lost???? And when I switched the phones they released the serial number on the iphone. It just doesnt add up? So what Im asking is do you have to report it lost or stolden to get out of the Iphone 4 package???

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