Once you have beaten Mody in Hide n' Seek he will reveal that under the Cavern is an underground chamber. Mody will climb through a small hole in the side while he directs the Sourcerers to dig up a newly revealed pile of dirt (if one has the required level in Wit). If one digs where Mody was found the second time, a hatch leading down to the cell will be revealed.
The cell has an Undead knight named Withermoore, who gives you a quest to find his soul trapped in a jar. His soul can be found in the underground chamber full of poison traps. You can enter this prison through the hatch that you uncover by pulling a lever. This lever is found to the left when you enter Fort Joy prison through the main gate.Edit
Discovering the forgotten cell grants the party 725 Experience.