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 appears to shoot him dead (although the view of this happening is partially blocked), 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. Supposedly led by McManus and with inside information from Keaton, they robbed a jewel smuggler being escorted by corrupt cops, netting millions in emeralds and getting over fifty cops connected to the smuggling ring arrested.
They then went to California to fence the jewels through a man named Redfoot that McManus has done business with in the past. Redfoot connects the Suspects with another jewel heist, but this heist goes badly, with the Suspects being forced to kill the target and his bodyguards. Making things worse, they learn afterwards that their target wasn't moving jewels at all, but drugs. After an angry confrontation with Redfoot, the Suspects learn that the job was arranged by a lawyer named Kobayashi, who wants to meet them in person.
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 sometime in their pasts), has ordered them to raid a ship manned by an Argentinian drug cartel 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. After that day Söze became an infamous but unseen force in the underworld, 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 decided to kill Kobayashi, only to be forced into accepting the assignment after all when he threatened their loved ones in great detail. The men attack the ship during the night, killing several Argentinian and Hungarian gangsters before discovering there is no cocaine. Hockney, a man seemingly being held prisoner in one of the ship's cabins, McManus, and then Keaton are killed by an unknown 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 had Verbal remain behind so Verbal could survive and witness Keaton faking his own death, a trick Keaton has pulled once before. Verbal finally confesses that Keaton had been the leader of the Suspects all along and not McManus as he had claimed earlier, 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 before using it normally. As Kujan runs outside to pursue Verbal, a fax arrives from the hospital where Kovash has finally provided a facial composite of Söze, which looks very much like Verbal. Kujan misses Verbal by moments as the latter disappears into a car driven by "Kobayashi".
