The guy is an *** for outright lying about the condition of the engine.
Your friend isn't too bright for looking at pictures of a rusty 340 and thinking he's going to get a rebuilt 340 for $1200 just because the wording in the ad says it's rebuilt. One doesn't need the heads off or a bore scope to know that this wasn't a freshly rebuilt engine.
If the engine is rebuildable, then he didn't get totally swindled because that's the going rate for a 340 in need of a rebuild.