First Sten must talk to you about the sword. You must have enough status (+25 or more i think), and try finding out why he murderd the peasants. He will tell you he lost his sword near the lake. So go to the lake (where you take the boat to the mages place), and there youll find a scavenger. Of course you must take Sten woth you. Ask the scavenger and he will lead you to a man (cant remember the name) that is at the entrance of Orzammar. Ask him and he will tell you he sold it to the mercenary dwarf (Dwayne?, cant remember for sure) that may help in the defense of red cliff. And there it is. You may buy it or take it by force from the dwarf.