Why isn't it considered fraud and thus illegal to sell copyright licenses to works that you don't own the copyright to?

If you change one pixel on a public domain work, it is now your derivative work. Public domain means that you are allowed to create derivative works.

Technically, their own signature on the image is their novel contribution. (Of course they wouldn't explain it this way to the customer.)

Just because you make something that's a derivative of a public domain work doesn't mean you own the copyright to it. It also needs your changes to meet the threshold of originality. Just one pixel definitely wouldn't, and it's a gray area whether just adding your signature would.

Also, wouldn't they just be displaying their derivative work, and giving the buyers the original?

Yeah, they need to find an IP lawyer who will take this on contingency and sue them for everything they have.

It's blatantly obvious theft and they'll keep doing it until they get smacked down in the legal system.