Morrowind:Larrius Varro Tells a Little Story

Quick Walkthrough
# Overhear the latest rumors or ask someone about their little secrets to discover that Larrius Varro wishes to speak with you.
# Meet Varro in Moonmoth Legion Fort, and he suggests that you should take care of the "Bad People" in Balmora.
# Ask around the Thieves Guild about the "Bad People".
# Go to the Council Club.
# Kill all the "Bad People", and make your way back to Larrius Varro to claim your reward.

Detailed Walkthrough
A Rumor
If you ask about the latest rumors in Balmora, you might discover that the local magistrate, Nolus Atrius (a character who doesn't exist in the game), is corrupt and that Larrius Varro has sworn to stop the corruption. Alternatively, people in town might tell you a little secret, which is that Varro has been looking to have a chat with you. In either case, Varro is the Champion at Moonmoth Legion Fort (just east of town) so you should head there and talk to him.

Larrius Varro
Larrius is in the back of the main fort, past all the vendor tables. At first, Larrius speaks very carefully and actually asks you to do nothing (which is his intent), but if you question him further he will tell you that he wants someone to wipe out five members of the Camonna Tong in Balmora. Though he doesn't know where they are, or even their names, he knows their professions: scout, pawnbroker, savant, thief, and smith.

The Bad People
Return to Balmora and ask around about the Bad People and you will be directed to the Thieves Guild in the South Wall Cornerclub (disposition of 50 or higher is needed). Ask around in the club and, if you are persuasive enough, you will learn that all of the Bad People are in the Camonna Tong, and they hang out at the Council Club in town.  Their names are: Madrale Thirith, Marasa Aren, Sovor Trandel, Thanelen Velas, and Vadusa Sathryon. The barkeep, Banor Seran, is the only other person in the building.

In the Council Club, you'll find 3 of the members in the tavern (you don't have to kill the Barkeep), one is downstairs, and one upstairs. Taking on all 5 at once (and sometimes the barkeep), can be very tough. You may wish to stock up on scrolls and potions beforehand. The two loners may be assassinated or taunted into fighting without alerting the others. Taunting any of the three members in the barroom, however, will likely cause the other two to attack you as well, so be prepared. A Frenzy spell may also work well. If not, moving onto the staircase or the bedroom corridor may limit those in attack range to one or two. Madrale and Marasa are somewhat hostile by default, thus easy to taunt. If you're planning to join the Thieves Guild or are already a member but haven't yet completed the Nerano Manor Key quest, make sure to get the key Sovor is carrying from his corpse before you leave.

Return to Varro
Unfortunately, unless you attacked them in self defense, you will become wanted by the guards. If you can make it back to Moonmoth Legion Fort without being apprehended, Varro will remove the price on your head in return for helping him out. The easiest way to get back to Varro is to use a Divine Intervention or Recall spell. Alternatively, you can use invisibility or chameleon to avoid being noticed by the guards, or simply sneak out of town, if your skill is high enough.

You will receive a nice Ring of Surroundings as a reward. If you managed to kill all of the bad people without obtaining a bounty, or were able to clear your name before speaking with Varro, the captain will be happy at your discretion and give you a copy of Biography of the Wolf Queen as well. One way to remove your bounty is at the nearby South Wall Cornerclub, the hangout of the Thieves Guild in Balmora. This can be done in between killings to maintain a bounty below 5000 gold, which will prevent the bug (mentioned below) where guards will continually attack you even after Larrius Varro's absolution of the bounty.

An easy escape path is to exit the Cornerclub building and cross the street to the Silt Strider and exit the town. Run East towards Moonmoth Fort, and at the fork take a left (North on the map) to run around the back of the Fort. Approaching from the Northeast, you can jump onto the wall of the Fort and run along the wall towards the central keep, where there is a trap door that leads you directly in front of Larrius Varro.  This requires at most a few seconds of invisibility while approaching the trap door and possibly none at all. The same concept can also be used to approach the South Wall Cornerclub from behind, unseen by guards, if you're looking to clear your bounty that way.

Notes
Warning: doing this quest by brute force (murder) likely gives you a bounty over 5000, which earns an automatic death sentence.  Guards won't ask you to pay; they'll just attack to kill you. Sneaking and other tricks will get you past these guards easily enough to finish the quest, but even after Larrius Varro says he'll take care of it, your trouble may never end. Several users report in the forums that after this quest some - but not all - Imperial Guards will attack you forever even with no bounty. The effect on the guards may actually occur with any guards that happen to attack you at the time you return to Varro. So if you somehow kill the bad people and then do the necessary traveling to be attacked by Imperial, Redoran, Telvanni, or Hlaalu Guards, as well as Ordinators, then all of those factions may well continue to target you even after your bounty has been reset to zero. Therefore, save your game before killing the bad people and redo the killing until your ending bounty is zero - or at least less than 5000.
One way to avoid this is through use of Mark and Recall. If you cast your Mark near Varro, you can Recall back without attracting attention from Guards.
This quest can also be a handy way of clearing up a bounty you've accrued by other means. You still can't get rid of a death sentence, but any bounty up to 5000 can be cleared by doing this quest, provided you don't go above 5000 in the process.
You can also avoid a bounty if you increase barkeeper's disposition so that he will not report the murders.
A failed pickpocket will earn a very small bounty, and allow you to kill all the bad people in self defense with no additional bounty. This has been fixed / changed in the German GotY edition - failing a pickpocket does NOT give you free rein to assault people even if they attack you.
If you have Bloodmoon installed, you can transform into a werewolf and have your alter-ego do the killing. Once you turn back, you can return to the fort and collect your reward.
After this quest has been completed, mentioning the topic Camonna Tong with members of the Thieves Guild all around Vvardenfell will increase their disposition by 20. This can be done repeatedly, as long as their disposition is below 70. This (as many other disposition gain topics) has been fixed in the German GotY edition - the gain will only work once.
Varro does not carry the ring before it is given to you.
If you bribed Sovor during the quest Nerano Manor Key and decided to return his key to Ondres, you will be unable to complete this quest without console commands, as Sovor has been "dealt with" by Ondres and is no longer in the game for you to kill.
If you are a member of House Hlaalu and about to solve the murder of Ralen Hlaalo, you want to report back to Nileno Dorvayn before going to Larrius Varro; otherwise you don't get paid.

Quest Stages