Turns out those sailors you "questioned" work with a gang of pirates up the coast. You should pay them a visit and question them some more to finally get to the bottom of this matter.
This is a multi-part mission.
A sea battle against three opponents. The smuggler you'll have to board is around level 22, and he'll be accompanied by two escorts (between level 16 and 19). You will have two NPC allies with you. Once you finish this part, you'll find out that the smuggler boss keeps what he calls an "insurance" in their hideout.
The hideout is a level 20 fort, and it will be guarded by three ships, all between level 17 and 19. You won't have any allies in this part, so you may wish to engage the ships well outside the fort's gun range and remove them first, then go for the fort.
You actually found the missing Magistrate! It turns out it's his deputy who was the villain. Go to his house and confront him. He will be a level 20 Lieutenant-rank opponent. Defeat him, then go and talk to the bartender, then claim your reward from the magistrate you saved.
- Defeat the Smuggler in Boarding Combat
- The Fort Must Not Be Destroyed
- Defeat the Fort in Boarding Combat
- Defeat the Deputy Magistrate