The civil agreement is the first major settlement involving a hedge fund for Spitzer and the U.S. Securities and Exchange Commission. They have been investigating similar market-timing schemes in mutual funds that benefit insiders at the expense of individual investors.
The stiff penalties "underscore how seriously the commission views hedge funds' roles in deceptive market-timing schemes," Mark Schonfeld, head of the SEC's New York office, said in a statement.
The New York firm set up more than a thousand accounts to hide its identity as it made more than $52 billion in trades, Spitzer said.
"Millennium developed multiple schemes that cost mutual-fund investors tens of millions of dollars," Spitzer said. "Restitution will be made to investors who were harmed."
The complaint accused Millennium of earning more than $100 million from 1999 to 2003, much of it structured to avoid mutual-fund defenses that block market timing or to conceal Millennium's role.
Market timing of mutual funds, which involves rapid trading to take advantage of price discrepancies, is not illegal but is prohibited by many funds because it can disadvantage ordinary shareholders by driving up their costs.
Spitzer claimed Millennium was able to camouflage as much as $19 billion in market-timing activity.
Many of the cases brought by Spitzer and the SEC in recent years have targeted mutual-fund companies that allowed favored clients such as hedge funds to engage in market timing.
"Millennium is pleased to have reached a comprehensive resolution of the investigations regarding mutual-fund trading in years prior to 2004," said Millennium spokesman Thomas Daly. "We agreed to these civil settlements in which we neither admitted nor denied the various allegations, as a business decision in order to put this matter behind us and to allow us to concentrate on our investments."
Millennium has $5.4 billion under management, 20 percent more than in 2003.