This is the 50 billion Ponzi scheme.
What isn't clear (to me) is where the $50B went. It must have been some combination of outright theft, trading losses, and expenses (commissions, salaries, etc.). If it was stolen, then it must still be somewhere; Madoff could hardly have spent any noticeable fraction. It's also hard to see how expenses could have accounted for much of that sum. Did he really manage to lose most of 50 gigabucks? Shouldn't that be hard to do? Roughly as hard as making that much? After all, every trade has a counter-party, so what Madoff lost someone else gained.
That's simple. It was a Ponzi scheme. For years Madoff paid investors 8 to 10 % year after year. That's where the money went. In a Ponzi scheme, the money invested by new investors is used to pay the old investors. In this way it seems Madoff's firm managed to build up $ 50 billion in debt mostly by sending money to investors.
Now it seems someone warned the SEC what was going on but couldn't get taken seriously for some reason. He wasn't named Mark-up-a-loss but he is named Markopolos.
update: Thanks for the link prof. Kleiman. Also I notice that lots of people are googling "where did the Madoff money go" so I'm getting a good bit of traffic (by my standards) by quoting him in my title.
One point I was going to add (which I just notice was also noted by anonymous in comments) is that the $ 50 billion figure sure seems to be exagerated since Madoff only claimed to have 17 billion in assets under management. I don't see how if one claims 17 billion one can be overstating by 50 billion. I will just call the amount missing X where X could be $17 billion or $590 billion or something in between.
The other point is that much of the money was never anywhere. Madoff did not collect X from investors. Some of the money he promised them was money he claimed to have made investing. He was claiming 8 to 10 % returns for years. If he was getting average returns of say 5%, there would be a whole lot of made up money which never existed in any way anywhere.
In my original post, I assumed that he sent the fake returns to investors as dividends. It is much more likely that he just added the numbers to their accounts. Of the X which is missing, some would be money paid in by investors, some would be the actual returns that Madoff got and some would neither be nor have been ever.
I'd guess most of the ever really existing money was paid to investors who cashed in their accounts taking their money, the returns on the money and much more out (why is taking money *out* cashing *in* ???). Madoff probably paid a lot to himself. He probably didn't spend all of that, is not personally bankrupt, and will have to give his personal wealth to investors to cover civil fraud liability. Also his accountant