The story begins in 1969, with three inmates in a New York prison — Earl (Van Peebles), Rocco (Kelly), and Carlito (Hernandez) — controlling their criminal empire within their cell. Upon their release, they all three look to control the drug trade in Harlem, which is currently in a power dispute between the Italian Bottolota crime family and black gangsters led by Hollywood Nicky (Combs). Rocco takes them to Artie Bottolota (Young) who at first is reluctant to work with blacks and Puerto Ricans, but who eventually cuts a deal with them in heroin distribution. The friends also meet Artie's son, Artie Jr. Soon, Earl's troubled younger brother Reggie joins them. After Artie Jr. offers to shake hands with Reggie, when he sees he and Carlito at a strip joint, Reggie turns him down, saying "my brother was doing fine without you". Artie Jr. insults Reggie with a racial slur, spurring Reggie to curse him and spit in his face. Artie Jr. assaults Reggie, but the fight is broken up. Carlito urges Reggie to wait until Artie Jr. and his crew leave. The mobsters leave, only for Carlito and Reggie to be cornered by them outside. Artie Jr. attempts to kill Reggie with a knife by cutting his tongue out, while Carlito is restrained. Rocco pulls up and tells Artie Jr. to let him go, reasoning they will "take care of him." Carlito also meets a young lady named Leticia and meets her brother Sigfredo. Carlito is then introduced to Leticia's entire family as a booker. Sigfredo knowing who and what Carlito really is and does, which leads to an immediate confrontation. After shooting Carlito, Sigfredo then has to leave and take his family as well to prevent himself any danger. Reggie, after being abandoned by Carlito, who Earl asked to take care of, attacks and kidnaps Artie jr. outside of his house, with the help of two other thugs. After Reggie gets the ransom, he leaves Artie jr. in the trunk of a car to die, but he is released by police and returns to his family. The Bottolotta Family blames Carlito, Rocco, and Earl, who left with his girlfriend to get married, for assisting Reggie in the kidnapping. Artie Sr. puts a contract on Carlito, Rocco and Earl until Reggie and his men are dead. The hitman contracted to kill them, Nacho Reyes (Luis Guzman), and Hollywood Nicky's driver help them find the two hoodlums who were with Reggie. Nacho tortures the two men to death and they give their dismembered body parts to Artie Sr. Carlito and Nacho find Reggie in an apartment, along with Earl who flew back to New York due to the situation. The four men drw guns, and Reggie threatens Carlito, preparing to fire on him. Earl chooses Carlito over Reggie, and murders his brother, sobbing over his body afterwards. Nacho leaves and Carlito, Earl and Rocco work for the Bottolotta Family, dealing heroin. The Bottolottas have them deal heroin for them, and then dismiss the three. Carlito and Earl pay off the N.Y.P.D., the team led by the most corrupt, feared cops in Harlem to raid and kill the entire Bottolotta Family. Carlito, Rocco and Earl fly to the islands with Earl for his wedding. Earl retires, and Carlito reunites with Leticia, retiring temporarily.
Al Pacino was originally set to make an appearance in the film, along with Sean Penn.
Hollywood Nicky is loosely based on the life of Nicky Barnes.
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