NEW YORK —Facebook Inc.'s bungled stock-market debut made it clear that big money still rules Wall Street. But this time, the small money got a look at how Wall Street really works — and that could spell trouble for the financial industry.

Millions of small investors have trimmed their investments in stocks after seeing their 401(k) accounts pulverized by the market plunge in 2008-09. The May 2010 flash crash — in which

$1 trillion briefly vanished from the stock market — served as another flashing yellow caution sign.

Facebook, with its worldwide popularity, was seen as a chance to rekindle popular interest in stocks when its shares began trading publicly last week.

Then the stock flopped. Investor enthusiasm was expected to be red-hot, but many backed away amid trading glitches on the Nasdaq, widespread news reports of insider selling and nagging questions about the company’s future prospects.

In the aftermath, it also became clear that big investors and wealthy clients had been warned the company’s financial outlook had weakened. Instead of rekindling interest in stocks, Facebook’s debut fueled long-running concerns about how the stock market works.

“This has proved the game is rigged,” said Charles Geisst, a finance professor and Wall Street historian at Manhattan College. “There’s just too many questions about the integrity of the stock market, and I think people are starting to realize this — individuals, at least.”

Prominent investor Mark Cuban, owner of the Dallas Mavericks basketball team, declared on his blog Wednesday that the investing public’s positive impression of the stock market had been “torched to the ground.”

Retail investors reportedly got 25% of Facebook’s 421 million shares in the initial public offering. The value of that allotment has declined by more than $500 million, based on Facebook’s closing price of $33.03 a share Thursday.

Regulators and congressional investigators have begun probes into what went wrong, looking into questions over information distributed ahead of the IPO. Morgan Stanley and other underwriters warned privileged clients that their analysts had grown sour on Facebook’s revenue growth potential. They failed to telegraph the same information to retail clients and the general public. Information affords a crucial trading edge on Wall Street. Regulators have tried to level the playing field for years.

A decade ago, regulators led by then-Atty. Gen. Eliot Spitzer discovered widespread manipulation of Wall Street analysts’ reports. He exposed a long practice on Wall Street in which analysts would write favorable research so their banks could win investment banking business.

Regulators settled their cases against 10 major firms for $1.4 billion in 2003 and put in place strict rules dividing banks’ research and investment banking divisions.

Although securities law experts say it’s unclear whether Facebook’s underwriters have broken any rules, Spitzer said underwriters’ selective disclosures in Facebook’s IPO may have violated the state’s laws against financial fraud.

He said underwriters’ actions may violate the “most fundamental principle, which is that an underwriter needs to be forthright, honest to the public.”

“Market theory is very simple,” Spitzer said. “You can’t give false and misleading material information to people, where you know it’s false and you correct it only to some but not to others.”

Morgan Stanley declined to comment, but it has said its IPO procedures were “in compliance with all applicable regulations.”

Giving well-connected firms an inside track has been one of the ways that big Wall Street firms attract and keep big clients. These clients are powerful profit drivers, and banks tend to give their best customers the best deals.

“These people give them more money in fees and commissions than others,” said Ernest Badway, a former U.S. Securities and Exchange Commission enforcement attorney who is now a white-collar defense lawyer in New York and New Jersey.

“Because of that — they’re part of a great revenue stream — they’re going to try to give every single advantage that they can to those particular people,” he said.

Large institutions and wealthy investors have a symbiotic relationship with Wall Street bankers. “The retail guy is at the end of the queue,” Geisst said. “He can’t do anybody any favors.”

In April, the SEC settled a somewhat similar case against Goldman Sachs involving precious tips to favored clients.

To generate more revenue, the giant Wall Street investment bank’s analysts and traders held “huddles” to share market commentary and trading ideas. During morning conference calls, Goldman passed along inside information to a select group of about 180 hedge fund and investment management clients.

Goldman, which brought in $37 billion in revenue last year, paid a $22-million fine to settle the case.

SEC rules generally require public companies to disclose “material” information to all investors once they disclose the same information to analysts and other market participants. But the rule governing fair disclosure — known as Regulation FD — has an exemption that allows companies to selectively disclose information while they are on “road shows” pitching IPOs to prospective investors, said John Coffee, a Columbia Law School professor who is an expert in securities regulations.

“There should be a rule that you can’t disclose information at a road show unless you’re willing to simultaneously disclose it to retail investors,” Coffee said.

Government inquiries have only just begun, and no one involved in the process has been accused of any wrongdoing. What rule changes, if any, may result from the Facebook IPO remain to be seen. But Spitzer and others say it’s a reminder that the big boys still rule Wall Street.

“The small guy is not getting a fair shot in the market,” Spitzer said. “That unfortunately has been true for too many years.”

andrew.tangel@latimes.com