When the basic pirates are dead, you'll be left to fight Captain Dread. Hop onto the ship and you'll have to fight off a large group of ghost pirates that're easily dispatched with radius spells. You can use the Lever to the left in order to raise the water level, bringing the ship to your level.
FABLE 2 CAPTIN DREADS TREASURE SERIES
Inside the chest is the Lever-grab it, then leave the way you came in, backtracking all the way to the top of the series of ramps overlooking the ship deck below. Open a small table next to the bed to find a key that you can use to unlock the chest in the same room. Through the door, you're lead to what appears to be Captain Dread's chambers. Look for a floor switch in the room that's covered by a pair of boxes, clear it, and press the switch to unlock the door. Just a bit further ahead, you'll find a door that's locked. When they're all dead, a door at the far end of the room opens. Distract the ghosts with Raise Dead castings and then charge up a radius Will attack to clear out the multiple waves of pirates. Once inside the cave, follow the glowing trail alongside a large ship and up a series of ramps that lead to a room crowded with pirate ghosts. You'll need to chop through some plants to follow the trail to the Sinkhole entrance.
Accept his quest and then leave the bar, following the glowing trail to the south end of Bloodstone. His throat gets dry, though, so you'll need to buy a beer (any beer) from the bartender and give it to Salty Jack so he can continue. Find Salty Jack in a Bloodstone bar and he'll start to tell you a story.