The film opens with criminal Dean Keaton lying badly wounded on a ship docked in the 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 bloodbath on the ship leaves only two survivors: Arkosh Kovash, a Hungarian mobster hospitalized with severe burns; and Roger "Verbal" Kint, a con artist with cerebral palsy. Customs agent Dave Kujan flies in from New York City to interrogate Verbal, who describes in flashback the events that led him and four other criminals - Keaton, Michael McManus, Fred Fenster and Todd Hockney - onto the ship.
Verbal explains that, six weeks earlier in New York, he and the other criminals were arrested on supposedly a trumped-up hijacking charge, and decided to pull another heist to get back at the police. Led by Keaton, a former corrupt policeman, they robbed a group of corrupt cops who transported smugglers in a police convoy. They then went to California to fence the stolen jewels with a criminal named Redfoot. Redfoot turned them on to another jewel heist, but the quarry turned out to be heroin, and the five had to shoot their way out. Soon after, a lawyer named Kobayashi contacted them and told them that Keyser S ze, a Turkish crime lord with a mythical reputation from whom all of the thieves had unwittingly stolen (including Hockney who hijacked the original truck six weeks earlier in New York), had offered them a job: invade a ship manned by a gang of Argentinian drug dealers with whom S ze was competing and destroy the $91 million worth of cocaine that they were transporting.
When Kujan learns of S ze from FBI agent Jack Baer, he questions Verbal about him. Verbal tells Kujan an underworld legend about S ze: that he had murdered his own family after they had been attacked by a gang of Hungarian criminals, and then massacred the Hungarians and everyone they held dear. He then went underground, never to be seen again, and did business only through underlings who did not know for whom they were working. He became a fearsome urban legend, "a spook story that criminals tell their kids at night".
Verbal goes on to explain that, after Fenster had bailed on the group, Kobayashi gave them a location at which to find their compatriot's dead body. They tried to kill Kobayashi, but he strong-armed them into performing the heist by threatening their loved ones. They staked out the ship and killed several Argentinian and Hungarian gangsters, but found no drugs on board. McManus, Hockney and a man locked aboard the ship were killed by an unseen person, who also killed Keaton and set the ship on fire as Verbal looked on.
Verbal concludes his story, but Kujan does not believe it. He insists that Keaton must be S ze, as one of the murder victims on the boat was Arturo Marquez, a drug dealer who escaped prosecution by claiming he could identify S ze   and who was represented by Edie Finneran, Keaton's lawyer and girlfriend. Kujan claims that the Argentinians were selling Marquez to S ze's Hungarian rivals and Keaton used the heist as a distraction to let him kill Marquez. Kujan also informs Verbal that Finneran has been murdered. Verbal says that the entire plan was Keaton's idea, but refuses to testify in court. Verbal's bond is posted and he is released.
Moments later, Kujan realizes that Verbal's entire story was a lie, pieced together from details on a crowded bulletin board in his office. Meanwhile, Verbal walks outside, gradually dropping his limp and flexing his supposedly withered hand. As Kujan runs after Verbal, a fax comes in from California: a police sketch artist's rendering of S ze, dictated by Kovash, that looks exactly like Verbal. Kujan misses Verbal by moments, as the latter disappears into a car driven by "Kobayashi".
Output: Where was the man in the urban legend from, according to the story?