I'm fairly certain that once you receive the Leatherfoot Raider Orders from Wallin Slyfoot, you return to Neriak and hand them off to Draxiz N'Ryt and he tells you to go kill the spy. Your handing him the orders is the trigger for the halfling to spawn, which you find by swimming up the waterfall and going into the tunnel behind it.
I'm nearly positive that the spy never hangs out as a random spawn - he's triggered only.
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