A criminal, Dean Keaton, is lying badly wounded on a ship docked in San Pedro Bay. He is confronted by a mysterious figure whom he calls “Keyser”, who shoots him dead and sets fire to the ship. The next day, the police recover twenty-seven bodies and only two survivors: Arkosh Kovash, a Hungarian mobster hospitalized with severe burns, and Roger “Verbal” Kint, a con artist with cerebral palsy. U.S. Customs agent Dave Kujan flies from New York City to interrogate Verbal. The events that led Keaton, Michael McManus, Fred Fenster, Todd Hockney, and Verbal onto the ship are then described by Verbal via flashback.
Six weeks earlier in New York, Verbal and the other four criminals were arrested as suspects in a truck-hijacking, only to be released thanks to Edie Finneran, Keaton’s lawyer and girlfriend. They then decided to pull a heist to get revenge on the NYPD. Led by Keaton, they robbed a jewel smuggler being escorted by corrupt cops, netting millions in emeralds and getting over fifty cops arrested. They then went to California to fence the jewels through a man named Redfoot, who connects them with another jewel heist. The heist goes badly, and the men learn that the job was arranged by a lawyer named Kobayashi. They meet Kobayashi, who says he arranged for their arrests in New York and that his employer, Keyser Söze—a mysterious Turkish crime lord whom each of the men have unwittingly stolen from—has ordered them to raid a ship manned by Argentinian drug dealers and destroy $91 million worth of cocaine being sold on board. Their reward will be the cash brought for the exchange, and being freed from Söze’s influence.
During Kovash’s interrogation, it is learned that there was no cocaine on the ship and that Söze was seen on board. Verbal then tells Kujan a legend about Söze: that he had murdered his own family when they were being held hostage by Hungarian mobsters, and then massacred the mobsters and their families before disappearing, doing business only through underlings who did not know who they were working for. Söze thus became a fearsome urban myth, “a spook story that criminals tell their kids at night”.
Concluding his story, Verbal reveals Fenster was killed trying to flee; the men then threatened Kobayashi, only to accept the assignment when he threatened their loved ones. The men attack the ship during the night, killing several Argentinian and Hungarian gangsters before discovering there is no cocaine. Hockney, a prisoner in one of the cabins, McManus, and then Keaton are killed by an unseen assailant, who sets fire to the ship as Verbal looks on from a hiding place on the dock.
Kujan deduces that Keaton must be Söze, as the prisoner killed on the ship was Arturo Marquez, a smuggler who escaped prosecution by claiming he could identify Söze. Marquez was being represented by Edie Finneran, who has also been recently murdered. Kujan claims that the Argentinians took Marquez to sell him to Söze’s Hungarian rivals; Keaton then used the assault so that he could kill Marquez personally and fake his own death. Verbal finally confesses that Keaton had been behind everything, but refuses to testify in court. Verbal’s bail is posted and he is released.
Moments later, Kujan realizes that Verbal fabricated his entire deposition, piecing together details for his story from items posted on a crowded bulletin board in the office. He also realizes that the name “Kobayashi” came from the brand on the bottom of the coffee mug that he was drinking from. Meanwhile, Verbal walks outside, gradually losing his limp and flexing his supposedly disabled hand. As Kujan pursues Verbal, a fax arrives from the hospital where Kovash has finally provided a facial composite of Söze, which resembles Verbal. Kujan misses Verbal by moments as the latter disappears into a car driven by “Kobayashi”.