I certainly hope you call the police when it happens again. You tried talking to the mother she believes she is letting her child grow naturally and make her own choices. I think that kid needs to learn up front that their choices have consequences and your daughter should not learn that people who make bad choices get away with it. I think this is an excellent opportunity for both kids involved to learn something extremely important.
Your child should be the top priority! Your daughter is being emotionally abused and is learning that emotional abuse is just a part of life you have to deal with. Please call the police the next time it happens. I would be sure to have your daughter witness the ordeal so that she sees that people who make bad choices do have consequences. The neighbors child isn't a bad person they just made a bad choice and can still grow and change.
I really hope things get worked out this story is so upsetting. ;(