The book begins with the Baudelairs alongside Mr. Poe on their way to Damocles Dock to find a new gaurdian for them. Inside one of the houses, they find their new guardian waiting for them, Aunt Josephine Anwhistle. Although she is a kind woman, she is very peculiar in that she has practically every fear there could be. She is afraid of almost every possession in her own home. Within Aunt Josephine's house is a library filled only with grammar books and a large window  at the far end of the room towards the lake. It is here where Aunt Josephine telss them how shores of the lake with her husband, Ike Anwhistle, and how he met his end due to the carnivorous Lachrymose Leeches which have the ability to smell food on a human if he or she does not wait long enough before going into the water.

The following day, the children tell Aunt Josephine of Hurricane Herman's approach. While gathering supplies for the storm, they encounter Count Olaf at the grocery store, disguised as a sailor named Captain Sham. The three children attempt to warn their new guardian about Captain Sham's true identity, but Aunt Josephine does not believe them due to Sham's charm and use of a peg leg to hide his tattoo of an eye on his left ankle.

Later that evening, Aunt Josephine receives a phone call from Captain Sham, and she then sends the children away. After what seems like hours, the children are awakened by a loud crash. Upon searching the house for any trace of Aunt Josephine, the Baudelaires come to the library where they find a suicide note from their aunt and discover that the window had been smashed. The note says that Captain Sham is to be their new guardian, but it is filled with grammar mistakes the children know Aunt Josephine would never have made. The children then conclude that Count Olaf is behind it and call Mr. Poe.

 After rereading the note, Klaus reveals that Aunt Josephine had purposefully written the note to hide a message reading "Curdled Cave". They conclude that Aunt Josephine is in fact not dead, but hiding.

After finding their way to the sail dock and avoiding Count Olaf's henchmen, they sail out through Hurricane Herman to Curdled Cave where they find Aunt Josephine. She tells the children that Count Olaf made her write the note, but instead of killing herself, left the message and threw a footstool through the window to give the appearance that she'd committed suicide. The children then convice her to come with them to tell Mr. Poe what has happened. 

While their boat has been attacked by the leeches, Violette creates a signal that grabs the attention of the boat near them. However, It is Count Olaf's boat. While boarding Count Olafs's boat, he tells them that he plans on being their gaurdian and inherting their fourtune. Count Olaf then pushes Aunt Josephine into the water with the leeches. 

When they arrive back at the docks, Mr. Poe is just fixing to hand the children over to Captain Sham when Sunny bites into his fake wooden leg breaking it in half, revealing his tattoo and real leg beneath. Olaf then locks the gates to Damocles Dock and once again escapes with his assistant and leaves the Baudelaire children searching for someone else to care for them