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This particular quest first becomes available when you reach Bloodstone at the end of the Stranded quest. Pay a visit to The Leper's Arms tavern on the waterfront and speak to the old piratey fellow named Salty Jack at the base of the staircase. He has "a tale for ye", but you'll have to buy him a pint of beer to get him talking. Do so, and he'll tell you that he beheld the figure of cold-hearted Captain Dread entering a nearby cave. Nobody here in Bloodstone believes him, so Jack wants you to investigate the smugglers' cave and prove that the ghost of Captain Dread really does walk these shores.

Hack your way through the brush at the end of the waterfront to the southwest to find the cave ol' Jack was talking about. You can even grab 300 gold inside a chest outside before venturing into The Sinkhole. Once you're in, dive down into the water below and you'll begin hearing the voice of Captain Dread himself - "Dread's treasure will bring ye a watery death!". Run past Dread's ship, up the wooden ramp ahead of you to reach, and through a stone door to reach an old mess hall. Here, you'll get a glimpse of Captain Dread's ghost before being set upon by a small army of ghost pirates. Slay them all, then continue in the same direction you were headed earlier.

In the back of the next room, you can smash some barrels and crates to reveal a pressure plate that will open the door to your right. This leads to a spiraling staircase that will bring you to Captain Dread's old bedroom. Search the bedside table with the book and lit candle sitting atop it and you'll find Captain Dread's Key. This will get you into the chest near the stairs. Grab the Lever from within, then return to the top of the wooden ramp next to Captain Dread's ship.

Using the lever, you can raise the water level in The Sinkhole. This brings Captain Dread's ship high enough for you to board it, but make sure you're prepared to face a couple dozen more ghost pirates and Captain Dread himself before you do. The ghost pirates are easy enough, but Dread has access to the Vortex spell and a nasty cutlass so he might prove to be a little more difficult. When he falls, you'll receive Captain Dread's Map, which will get you to the island where the notorious pirate hid all his stolen loot. Take the helm and you're on your way.

There are ten bags of 1500 gold each scattered around Lion's Head Isle. The first one can be found in a chest behind some barrels in the broken half of a ship straight in front of you. Kill the giant beetles outside, then swim out past the rocks to find a small sand-covered landing with a second chest containing another bag of gold. For the third, you'll have to hack you way through some brush just up the slope leading to the center of the island, and then vault down to the top of the second half of the broken ship. Vault off to your left when you reach the ledge overlooking the center of the island and you can loot the chest there for the fourth bag.

The fifth, sixth, seventh, and eighth are all located in the center of the island, surrounded by waterfalls. One can be reached by digging, one can be reached by diving, one is in a chest sitting behind the large tree, and yet another is in a chest behind the largest waterfall. To claim the ninth, you'll have to go up the grassy slope on the other side of this area and smash through some wooden planks to discover yet another chest. Vault off the ledge just beyond the planks and you'll have found the last chest containing the final bag. It's time to report your success to Salty Jack, so return to the ship and chart a course back to Bloodstone.

You'll meet up again with Salty Jack outside The Sinkhole. He cackles with delight to hear that you've sent Captain Dread back to the grave and stolen his ship, the Marianne. "You'll be a legend among pirates" he claims, after which you'll receive 7500 renown points and Captain Dread's Sword. Unfortunately, the sword is just a trophy and can't be used during your next swordfight. Damn.