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New York, 1929, a war rages between two rival gangsters, Fat Sam and Dandy Dan. Dan is in possession of a new and deadly weapon, the dreaded "splurge gun". As the custard pies fly, Bugsy Malone, an all-round nice guy, falls for Blousey Brown, a singer at Fat Sam's speakeasy. His designs on her are disrupted by the seductive songstress Tallulah who wants Bugsy for herself.

Mystery Inc. withdraws from solving crimes after botching a case. When Vincent Van Ghoul contacts the gang about an unfinished investigation from Daphne, Shaggy and Scooby's past, the gang springs into action to finish the job that involves catching the 13th Ghost that escaped from the Chest of Demons and is still at large.