I can confirm, that as of March 17th, there’s still something icky going on in this quest.
There are clickable “Dwarven Relic” items, but they’re just flavor stuff, totally useless. Now I’m totally fine with that, except that when you click them, your skill bar flipped as if you picked up an item! It just flips and goes back to weapon skills. Anyone would think that’s a bug. The catch is: The scabbard is right there on the lake floor.
So, if you’re “stuck on this”, just swim around until the “Search” part updates. Then, you’re close to the scabbard. Look for it directly on the ground. The rest updated fine. Just go to the marked “escape” area.