The Shy Squad resided near Red Station. It may have been some of them that stole items from Toad Town and placed them in chests, as part of Kammy Koopa's plan to make Mario unable to avoid things he hates (although, depending on what the player has Princess Peach say, Bowser was under the belief that Mario hated Mushrooms, Super Sodas, and Thunder Rages, all of which are helpful items).
Mario encountered the Shy Squad at Red Station, and they ran into a dark room. They cannot be defeated in the dark; however. When Mario brought Watt into the room to light it up, the Shy Guys ran, blasted a hole in a wall, and ran through it into the next room, where General Guy was. Mario and his partners fought the Shy Squad and defeated them. After General Guy himself was defeated, he and the Shy Squad ran off, never to be seen again.
One particular member of the Shy Squad always seems to fall over when trying to run.
They also appeared in the credits parade. Two of them were seen dancing on a stage, along with General Guy and four Groove Guys. Twelve of them walked by after the stage, and the fifteenth, in his usual fashion, ran after them but fell over, got back up, and ran off after them.
The Shy Squad has 15 HP. They attack for 1 HP each, as each attacks individually, but hit Mario repeatedly. Whenever the Shy Squad is attacked, they lose as many Shy Guys equal to the damage they take. For example, if Mario does a hammer attack for 4 damage, four of the Shy Squad will be defeated. They can be defended against with a Defend Plus badge (making it impossible for them to do any damage) or for a Volt Shroom or Zap Tap Badge, which will not block the first hit but will zap them, interrupt the attack, and defeat one of the Shy Squad, ultimately making Mario only receive 1 damage. The hits can also be guarded against with the Action Command.
If only a few Shy Guys are left after Mario and his partner have attacked, the Shy Guys will try to run, but General Guy will beat them up offscreen for deserting him, and they will run off.