The Squidfather's Lair is a location shown in the first two games.
Spongehead and Boss the Sharks go here as Spongehead's punishment for forgetting where he hid the kelp treasure. When Squidfather discovers the sharks lost the treasure, he gets mad and spews ink everywhere, but this is enough for Spongehead to remember that he hid the treasure in the sunken ship. The Squidfather calms down and the sharks leave to retrieve the treasure.
The sharks go here when they reveal to the Squidfather they can't steal any more toys due to the guppies still being in the schoolhouse and Freddi Fish and Luther are trying to solve the case. The Squidafather then angrily threatens the sharks to get rid of the guppies and Freddi and Luther or they will face severe consequences and the sharks leave to comply with his orders.