Attention seeking. I knew a widow who was like this - she'd come out with more and more outrageous stories, she swore to me that once she was having an affair with Tom Jones after meeting him at a party.
anyway, back to your daughter. she could 'confront' him in a round about way and say,
I think 'somebody' is preying on your soft-hearted nature and trying to make a fool of you, because 'John Smith' who you think is dead, is very much alive and kicking, he was seen in town yesterday - he was with his son/daughter - they were buying a birthday present for a child who's party my cousin's lad's going to, so I know it's the right person, you better get on to whom ever told you this pack of lies and read them the riot act.
Realising he's been rumbled might make him quiten down for a while, and then the next outrageous story he comes out with, your daughter can say to him, now just you make sure about this - sounds a bit far fetched, are you sure that person who tried to wind you up last time isn't at it again? she could then mock admonish him for being 'so gullible' this should either cure him of this habit or make him move on to somebody else.