A key witness in the government's criminal case against convicted financier Michael Milken agreed yesterday to pay nearly $8 million to settle civil charges alleging insider trading, the defrauding of clients and other securities violations.

David Solomon, an investment adviser who headed Solomon Assets Management in New York City, also agreed to be barred from the securities industry and to submit his former business to an independent audit to determine how much money he might owe to former customers, to whom he gave advice on how to manage an estimated $1.5 billion.

Of the $8 million Solomon will pay to the Securities and Exchange Commission, $7.3 million represents what the government contends were illegally obtained profits. The remaining amount is a civil penalty. The money will be placed in a fund to repay clients who file claims from Solomon's former clients.

Solomon was granted immunity from criminal prosecution in exchange for providing information against Milken. He settled the civil charges with the SEC without admitting or denying guilt.

Milken last week was sentenced to 10 years in jail on six felony counts of securities violations to which he pleaded guilty earlier this year. Government prosecutors believe that Milken pleaded guilty to two of the six counts as a direct result of Solomon's cooperation and willingness to testify in court against his former associate.

The two counts alleged that Solomon used securities trades to created artificial tax losses in 1985 with Milken's help and that Milken and Solomon conspired to cheat Solomon clients in order to pay Drexel money owed by Solomon personally. In addition to allegations involving those two counts, the SEC civil case also alleged that Milken and his investment firm, the now-bankrupt Drexel Burnham Lambert Inc., tipped Solomon about upcoming transactions that enabled Solomon to personally profit from insider trading, according to SEC attorneys.