I found the Smuggler's hideout and successfully persuaded the guard. Nothing happened, then when I tried one of the doors, the guard turned hostile and attacked me. I killed the guard, and picked up his key, which didn't seem to open anything.
When I left the building, Wally and the Smuggler outside were hostile. The smuggler attacked me, and Wally joined in. I killed the Smuggler, and a DM possessed Wally and convinced him to stop fighting.