Ms Hadley was an "innocent victim of a diabolical scheme" the Orange County District Attorney's Office told the Washington Post.
Prosecutors exonerated Ms Hadley – who spent 88 days in prison altogether - of all charges, and instead charged Diaz with kidnapping, false imprisonment, perjury and other crimes.
"It's often said that true life is stranger than fiction," District Attorney Tony Rackauckas said in a news conference. "The facts of this case make that statement spot on."
Mr Rackauckas speculated that the case was part of a twisted “love triangle”. Ms Diaz is married to Ian Diaz, a US Marshal, who dated Ms Hadley for two years between 2013 and 2015.
The police realised that Ms Diaz was the mastermind behind the Craiglists post when “after months of painstaking investigations” they realised that emails supposedly sent from Ms Hadley to Ms Diaz had in fact been sent by Ms Diaz herself using a complex web of virtual private networks and third party servers.
Diaz was arrested in Phoenix on Friday. Meanwhile Michelle Hadley’s lawyer has said that the development was a “huge relief” to the 29-year-old student. This has been a huge nightmare for me..probably the most traumatic experience of my life,” a weeping Ms Hadley told the LA Times.