Well, here's what I'd do in your situation:
A) Buy a brand-new clutch for the bike, and try it, see if it works.
B) If that does not work, try a new clutch bell housing.
C) Pick up that other bike, so you would have TWO bikes, and get that one running well.
D) Part your original one out, and try making back your money off the parts.
I have four of these bikes, plus a bunch of parts. I figure I've spent at least $500 and then some for everything so far. Not a single one of the bikes was over $100, but at least one of them has an extra $100 in parts on it.
Ultimately, it's your call. I AM sorry to hear you got screwed like this, though - some people just don't have any sense of decency. Been there, done that - now I suspect everything that sounds too good to be true, even if it IS true.
P.S. Regardless of what these guys say, putting a bigger engine in that bike would simply snap the frame like a twig. Cags don't do well on engine swaps. Cateye frames, however ..... Several people have swapped in 6.5hp engines, both here and at PBP.com, and appently the swap isn't that hard - just some custom brackets for the engine, a new clutch setup, a few little odds and ends, and a set of wheelie bars on your butt to keep you on the seat for when you crack that throttle open ........