When fights break out in Shantytown, the police chief thinks an undercover operation could solve the problem. The chief asks Frank and Joe Hardy, sons of internationally-known detective Fenton Hardy, to investigate. Frank, 18, and Joe, 17, live in Bayport with their parents and have helped their father on cases before.
Frank and Joe decide to explore the waterfront on their boat, the Sleuth, with their friends, Chet and Biff. Once on the bay, another boat, the Black Cat, almost hits them. As the brothers swerve to avoid a collision, the steering mechanism jams. Their friend, Tony, comes alongside in his boat, the Napoli, and tows the Sleuth back to the docks.
After reporting the incident to the Coast Guard, Frank and Joe pick up costumes at a shop downtown for a party that night. At the shop, they overhear part of a heated conversation between the owner and two other men, Fritz Stark and Nick Glaser. On the way to the party, Frank and Joe see four masked men in pea jackets flee the bank in a car and escape by boat from the waterfront.
The police arrive, and the Coast Guard is notified of the getaway boat. Frank and Joe volunteer to help search the bay, but discover that the Hardy boathouse was broken into and the Sleuth is gone. At the station, Frank and Joe tell the chief about their missing boat, and the chief tells them that the getaway car was stolen in a city up the coast called Northport.
Frank and Joe stop at home before the party, and their father tells them he has been hired to solve the bank robbery case. At the party, Chet is wearing the same costume as Frank. In the middle of the night, the Hardy family learns that Chet and Biff are missing, but no one can find clues to their whereabouts.
The next morning, there still aren't any leads for finding the Sleuth, Chet or Biff, but the police have identified the owner of the stolen car.
Riding their motorcycles along the coastline to look for the Sleuth so they can boat to Northport and investigate, Frank and Joe spot their boat on the beach. The boys ask the Coast Guard for help. As they near the boat, they see a piece of Chet's costume mask floating in the water. The Coast Guard tows the Sleuth back to the docks, and they leave it for repairs.
Frank and Joe give the police the costume mask clue before investigating the waterfront for their undercover Shantytown case. At the waterfront in Shantytown, a man named Hank Sutton starts to pick a fight with Frank, and another man named Alf Lundborg intervenes. Frank and Joe see the driver of the Black Cat, Ben Stark, talking to Hank. As Frank and Joe eat dinner with Alf and his friends, one of the men starts to put a piece of trash in the fire. When Frank realizes it looks like a piece of Chet's costume, he pulls it out. Sure enough, it is a piece of the costume. The Hardy boys return to the police station with the clue, and the chief sends officers to Shantytown.
At home, Frank and Joe learn their father is working on a case involving a national bank robbery gang. He thinks the Bayport job is the work of that gang. The Hardy family receives a postcard from Chet and Biff postmarked in Northport, but Frank and Joe aren't convinced it is from them.
Frank and Joe decide to take the Sleuth to Northport to investigate. In the Sleuth's boathouse, they find broken glass and save it for later reconstruction. Next, they locate the Northport store selling the postcards, and the clerk provides a description of a man who recently bought some. The description matches the passenger they saw in the Black Cat, a man known as Pops. The brothers track down the owner of the Black Cat, the Northport dock manager. He rented the boat to three men (Ben, Fritz and Pops) a few days before.
At home, the boys put together the glass pieces and discover it's a pop bottle. Later on, they learn that Pops likes that brand.
After Hank reported a missing radio and the police discovered it in Alf's backpack, the chief takes Alf into custody. The boys vouch for Alf, telling the chief they think the radio is a plant, and the chief releases Alf.
Talking to the police, Frank and Joe wonder if a group of thieves is operating out of the waterfront, whether Hank is one of the thieves and if the trouble in Shantytown comes from the thieves' infighting. Chet and Biff are still missing, and their families also have received postcards. They tell the police chief about the bottle clue and their trip to Northport.
The next day, the boys follow up on the radio clue. The store that carries the radios was short a crate in the last shipment. Back at Shantytown, Frank and Joe notice a pop bottle in the trash that matches the one they found in their boathouse.
When the boys discover Hank injured on the cot in his shack, they give him first aid and call an ambulance. The brothers then follow up on the bottle clue. No one in town sells that brand of pop; one clerk has seen it in Northport.
As Frank and Joe hang out with Tony, Jerry and other friends, the group decides to go to Hermit Island to look for Biff and Chet, but an old man scares them off. The police tell them that the owner of Hermit Island died quite some time ago, and the island is state property.
The Hardy boys begin to wonder if Chet and Biff were mistakenly kidnapped, so they hatch a plan to get the crooks to lead them to their friends. The brothers return to the costume shop. They don't see the shop owner, but Ben and two dockhands, Moran and Duke, are talking in the back. The three men kidnap the boys and take them to a shack in Shantytown. Duke is left to guard the boys, but they manage to overpower him, tie him up and escape.
As Frank and Joe step outside of the shack, police officers arrive. Inside the shack, they find the bank robbers' masks. The Hardy boys' father and other officers were tailing Ben and Moran, and along with Duke, they take them into custody.
At home, the Northport dock manager calls the boys to say he found an envelope addressed to Fritz from the radio distributor, the same one that made the radio Hank reported stolen.
Frank, Joe, Jerry and Tony decide to go to Hermit Island again, taking both the Sleuth and the Napoli, in case they find Biff and Chet. On the island, they discover a cave and hear a radio, but then Tony sprains his ankle in a landslide. As the boys walk back to their boats to get help, they find five pea jackets on the trail. Reaching the cove where they hid their boats, Frank and Tony leave on the Sleuth to find the Coast Guard. Joe and Jerry follow in the Napoli. When the Napoli runs aground, Joe and Jerry see another boat coming with two men (Fritz and Nick) in it. Joe and Jerry try to conceal the Napoli, but Fritz and Nick discover them and take the boys to a cave to join the kidnapped costume shop owner.
Ben, Fritz, Nick, Pops, Hank, Moran and Duke are both a gang of thieves and a bank robbery team. They stole the radio shipments and robbed the bank in Bayport. The trouble in Shantytown is due to the gang's arguments over shares of money.
Meanwhile, Frank and Tony arrive at the Coast Guard station and call the police chief. Tony is taken to a doctor, while Frank, Coast Guard officers and the police go to Hermit Island. Frank locates Joe, Jerry and the costume shop owner in the cave. The Coast Guard officers and police join the group in the cave, and they all start down a hidden passageway to look for Chet and Biff. On the way, they overpower Nick. Fritz and Pops are holding Chet and Biff hostage, but the group overpowers them, too, and rescues the boys. Biff shows the group the stolen crates of radios stored in the cave, and Chet shows them where the bank money is buried.
In the end, Frank and Joe's father congratulates the boys and their friends for solving the case.