A former chairman of the Federal Home Loan Bank Board testified today he saw indications that the stock of Biscayne Federal Savings and Loan Association was being traded on the basis of inside information in the days before the board put Biscayne into receivership.

The bank board declared Biscayne Federal insolvent on April 6 and turned it into a mutual association, wiping out the shareholders' interest. The board is seeking bids from banks and thrifts around the country to take over the institution, renamed New Biscayne Federal. It has been sued by the old institution and Kaufman & Broad, the largest single stockholder, both seeking to block the takeover.

Richard Pratt, who resigned as bank board chairman on April 30, testified that he saw New York Stock Exchange records on April 6 showing heavy trading in Biscayne stock in the preceeding days, which had pushed the stock price down about 20 percent at a time when most thrifts' stock was rising.

He said he considered this to be "evidence of a high probability of insider trading" and concluded "that trading in the stock should be suspended." The takeover followed.

Pratt's testimony was the latest flareup in a battle between the failed savings and loan association and government financial regulators that has raised fundamental questions of public policy versus protection of private investors' interests. It is the most serious challenge yet to the action taken over the past two years to rescue foundering thrifts.

Biscayne's stockholders charge that the regulators negotiated with the S&L and Kaufman & Broad for 16 months, but declined to act on any of the proposals they presented to improve its capital base. Instead, the suit alleges, the government secretly decided to nationalize the company, attempted to circumvent the power of the courts, and caused a run on the S&L which now amounts to $300 million.

This is the first trial in which the bank board's chairman and the director of the Federal Savings and Loan Insurance Corp. have had to defend their actions in person.

Pratt testified that the government rejected a proposal by Kaufman & Broad to infuse capital into financially troubled Biscayne because the deal called for the FSLIC to contribute $25 million in nonrefundable assistance to the stock corporation. "It was an example of federal monies being spent to help the stockholders of a private corporation without expressed authorization by Congress," he said.

Biscayne's lawyer charged that the government acted in bad faith because Pratt and other officials continued to negotiate with Kaufman & Broad throughout the spring while allegedly preparing secretly to seize the S&L.

Biscayne also contends the April 6 meeting was a "sham" conducted as "window dressing to create the best appearance for the inevitable scrutiny of post-seizure judicial review." Its most telling evidence was a staff memo of late March which shows the bank board's general counsel, Thomas Vartanian, outlining a scenario prior to the seizure. It says in part: "Wednesday: turn down lead. No decision to close. Biscayne issue press release. Board suspends trading. Thursday: Hope for run. Friday: Close (if run)."

The trial offers interesting insight into how policy is made, when it is weighed and how decisions are taken.

By far, the most sensational testimony of the trial occurred Wednesday when Frank M. McDermott, an expert on tape analysis, gave an audio demonstration to the court of what he said were two gaps--of 36 and 6 seconds--on the tapes of bank board meetings about Biscayne held on March 17 and April 6. "It is my opinion that these erasures were done intentionally," said McDermott. A bank board attorney responded that the gaps could have made accidentally when the tapes were transcribed.

Moreover, McDermott cast doubt on whether the tapes given him by the bank board were the original tapes of the meeting because there were portions of the transcript which were not on tape. Finally he said that differences in references to the time noted on the tapes show that one hour and 15 minutes of the meeting were not recorded. Pratt said today the off-the-record discussion concerned the choices the board had in dealing with the situation but he said he had no idea what caused the gaps or erasures.

The trial is to resume June 6.