In all reality this is one of a couple of different issues.
Accidental grounding. Which doesn't seem to be your problem as it sounds like you don't have that input even wired.
Motherboard issue. Something is wrong with the design of your motherboard that causes this to happen.
Power issue. See motherboard issue above. For whatever reason the current is dropping too low on your PS2 ports when you use the trackball, causing the ghosted input.
Does this happen when you use a PS2 mouse instead?
How about a USB mouse?
Does it happen in MSDOS mode (use a windows 98 boot disc to get to dos if you are running XP).
Is there any actual continuity between the sw8 position and ground when it is registering. Set your multimeter to check continuity, put one lead on sw8 and the other on ground. Should be no continuity. Move the trackball, see if your meter shows any continuity when you are moving it. If you don't own a multimeter then you need to buy one, as it is the single most important tool to own if you are into this hobby. It is more important than a 1 1/8" spade bit even.
Does it happen when you take the I-Pac out of the picture altogether (just plug in a keyboard).
Does it happen with another computer?