Facebook Inc. (Nasdaq: FB) , whose shares fell to a record low on Friday, failed to persuade a judge to approve a $20 million settlement resolving a lawsuit over “sponsored stories” that provides cash for advocacy groups and attorneys and no money for users.

U.S. District Judge Richard Seeborg in San Francisco refused to grant preliminary approval of the accord, saying that while it isn’t feasible to divide $10 million among as many as 70 million affected customers, it isn’t sufficient to justify giving that money only to advocacy groups. Lawyers for customers had argued the groups would be “watchdogs” over Facebook.

Seeborg also said he had “serious concerns” about a provision in the settlement to pay plaintiffs’ attorneys as much as $10 million.

Facebook was accused in a lawsuit of appropriating the names, photographs and identities of users to advertise products without their permission. The company’s “sponsored stories” were a “misleading advertising scheme” using material posted by Facebook members on their profile pages, according to the complaint.

California laws outlawing using someone’s name or likeness in advertising without their consent provide damages of $750 a violation, Seeborg said. Lawyers for Facebook and customers argued that paying users cash isn’t practical because even paying each $10 could mean a $1 billion settlement, assuming 100 million users were affected, Seeborg said.

‘Too Big’

“Are some class actions simply too big to settle?” Seeborg said in his order yesterday.

He said Facebook and the plaintiffs’ lawyers can modify the settlement or renew their request for approval of the existing accord with more legal arguments addressing his comments.

Consumer Watchdog, a Santa Monica, California-based group that opposed the settlement, praised Seeborg’s decision.

“This decision does much to defend the integrity of the class-action process,” said John M. Simpson, Consumer Watchdog’s Privacy Project Director. “The way this deal was proposed there was no real benefit for class members.”

Robert Arns, an attorney for customers, didn’t immediately return an e-mail seeking comment on the judge’s order after regular business hours yesterday.

‘Fair, Reasonable’

“We continue to believe the settlement is fair, reasonable, and adequate,” Andrew Noyes, a spokesman for Menlo Park, California-based Facebook, said in an e-mailed statement. “We appreciate the court’s guidance and look forward to addressing the questions raised in the order.”

Facebook, the world’s largest social-networking service, fell yesterday to $19.05 in Nasdaq Stock Market trading, losing almost half its value since an initial public offering in May, after lifting of restrictions on share sales by its biggest investors.

Under the proposed accord, Facebook consented to revising its terms of usage so subscribers can more easily see when they’re being shown as endorsers of products and games for which they clicked a “like” button. The revisions would also let users limit the display of their content and interactions alongside “sponsored stories.” Minors can opt out of the advertising.

The proposed accord required the company to pay $10 million to be shared among advocacy groups for children, consumers and electronic privacy.

The case is Fraley v. Facebook Inc., 11-cv-01726, U.S. District Court, Northern District of California (San Jose).