I have never played GOF 2 or 2.5. I think there are probably some bugs with those mods (from what I've read on the internet), but I have left them mostly as original because frankly, they stripped out most of the best developments from 1.2, so they aren't really worth playing or devoting work, in my opinion; GOF 1.2 is the better among 1.2, 2.0 and 2.5 GOF titles, and from my own gameplay, can confirm most of the major quests work fine.
That said, if I remember correctly, you don't get arrested until you go around the corner, closer to Morgan's residence. Try walking around that corner to his house.