Hiding in Olaf's trunk, the hapless siblings end up at the Caligari Carnival, where they're accepted as carnies by a fortune-teller named Madame Lulu, who divulges information to Olaf about the V.F.D. Lulu's fortune-telling turns out to be a major scam. She's actually a member of the V.F.D. named Olivia who gathers intel by way of a secret archival library, not psychic powers.
Claiming to spice up publicity for the carnival, Olaf orders Violet and Klaus to be fed to a pit full of lions. The siblings escape this fate, and instead, Olivia and one of Olaf's lackeys fall into the pit. Olaf burns the carnival down and takes the children onto a caravan attached to his troupe's car. On a steep cliff, Klaus and Violet sever the rope that connects the car to the caravan. However, Olaf grabs their baby sister and the siblings are now separated.