Apple has spoken to local police about the incident and the investigation is believed to be headed by a computer crime task force led by the Santa Clara County district attorney's office, the source said.
The purpose of an investigation is to determine whether sufficient evidence exists to file criminal charges.
Gizmodo, part of Gawker Media, paid $5,000 for what they believed to be an Apple iPhone 4G prototype. The iPhone was reportedly lost by an Apple employee then found by someone who contacted the site.
There has been much discussion online as to whether the finder/seller or Gizmodo violated any laws by taking possession of the device. CNET has not been able to confirm whether the investigation is targeting Gizmodo.com, the seller, or both.
The computer crime task force is called REACT, which stands for Rapid Enforcement Allied Computer Team, and was established in 1997 with a goal of working closely with Bay Area technology companies.