Shortly after the events of The Reptile Room , Mr. Poe puts the Baudelaire orphans, Klaus, Sunny and Violet under the care of Aunt Josephine, who lives in a house atop a hill overlooking Lake Lachrymose, a river so large that hurricanes have occurred in that area. Aunt Josephine, despite being a good-hearted elder, lives an unusual lifestyle of having phobias of almost everything from cooking food to her welcome mat.
While helping Aunt Josephine with shopping in the grocery store, Violet literally runs into a sailor named Captain Sham, who she concludes is secretly Count Olaf in disguise. Aunt Josephine declines to believe this due to "Captain Sham"'s apparently charming personality. That night, the children hear a crash and find out that their new guardian had jumped out of the Wide Window that overlooks Lake Lachrymose, and that before doing so left a note for them informing them that Captain Sham will be their new guardian.
Despite relating their suspicions to Mr. Poe that the note was a forgery by Count Olaf, he again refuses to believe them, thus they are forced to have dinner with Mr. Poe and Count Olaf at a restaurant called the Anxious Clown. Needing a distraction to come up with a strategy, Violet puts peppermint in her own food and that of Klaus and Sunny. Allergic, they break into hives, forcing Count Olaf to allow them to go back to their aunt's house. Klaus shows them how Aunt Josephine had written the note, due to the handwriting, but purposely made grammar mistakes to make a hidden message, which are the two words 'Curdled Cave'.
With this information, the Baudelaire orphans travel by foot to the Curdled Cave, near Lake Lachrymose while another hurricane strikes. Upon arriving at Captain Sham's store for boats, they encounter one of Count Olaf's henchmen, a fat person that looks neither a man or woman whom they encountered in the first book as well. After Sunny steals the keys to the boats, he/she suddenly wakes up but fails to capture them, so they are able to sail to the cave. They finally endure the storm and reach the Curdled Cave, where Aunt Josephine reveals that Count Olaf forced her to write the note, and he had simply broken the Wide Window to cause them to believe that she had commit suicide.
While traveling back, Lachrymose leeches attempt to suck their blood due to smelling food in Aunt Josephine's stomach since she ate a banana under the one hour limit. They are able to send a signal for help, but only Count Olaf arrives in a ship. After leaving Aunt Josephine to be eaten by the leeches, he brings the children back to the house, where Sunny is able to prove that he was Count Olaf to Mr. Poe by biting off Count Olaf's fake wooden peg to reveal his eye tattoo underneath. He and his henchman escape and lock the Baudelaire Orphans and Mr. Poe in the gate of the house, and when they get out of the gate the convicts have already escaped, leaving Mr. Poe to look for a new guardian for the Baudelaires.