Updated from 1:51 p.m. EDT

Shares of

Take-Two Interactive

(TTWO) - Get Report

took another whipping Tuesday after the flap surrounding sex scenes in

Grand Theft Auto

prompted the House of Representatives to seek a Federal Trade Commission investigation.

But even as investors fled the stock, one analyst raised her rating to buy from hold, arguing that the "regulatory scrutiny is overdone."

Take-Two shares fell to as low as $23.03 in the regular session before closing down $1.84, or 7.2%, to $23.59. In after-hours trading, shares fell 52 cents, or 2.2%, to $23.07.

The selloff came less than 24 hours after the House of Representatives overwhelmingly approved a resolution Monday asking the FTC to investigate whether Rockstar Games, the Take-Two subsidiary and developer of the

Grand Theft Auto

franchise, "intentionally deceived" the Entertainment Software Ratings Board to avoid an "adults only" rating on its game.

The resolution, passed by a 355-21 vote, also says that the FTC should apply the "toughest of penalties" if it finds Rockstar committed such deception.

After the bell, Take-Two published a press release saying it had been notified that FTC staff is investigating advertising claims made for

Grand Theft Auto: San Andreas

.

"The company intends to fully cooperate with the FTC inquiry, and believes that it acted in accordance with all applicable laws and regulations," Take-Two said in the release. "Rockstar Games and Take-Two Interactive regret that consumers may have been exposed to content that was not intended to be accessible in the playable version of Grand Theft Auto: San Andreas."

The FTC investigation postdates the rating board's decision to change the rating on

Grand Theft Auto: San Andreas

, the latest installment of the best-selling video game franchise, from "mature" to "adults only" in response to the discovery of

steamy sex scenes that can be unlocked with software available on the Internet.

The discovery prompted Take-Two to stop making the latest version of the game and slash its financial outlook, while several retailers, including

Wal-Mart

(WMT) - Get Report

and

Best Buy

(BBY) - Get Report

, pulled the game from their shelves.

Although she suggested fines and firings are possible outcomes of an FTC investigation, Citigroup Smith Barney analyst Elizabeth Osur still raised her rating on Take-Two to buy from hold based on valuation.

"While we believe the risk surrounding the

Grand Theft Auto

franchise and Take-Two remain high -- specifically related to the possibility of fines or loss of key personnel -- we think that the stock reaction is overdone and that shares appear cheap," Osur wrote in a note Tuesday morning. (Her firm has not done banking with Take-Two.)

For comparison, she noted that the fine for Janet Jackson's infamous Super Bowl exposure totaled just $500,000 for

Viacom

, while prior fines against

Clear Channel

for Howard Stern broadcasts also fell below $1 million.

Even if the fine totaled Take-Two's profit on the game -- which Osur estimated at $168 million, or $2.38 a share -- that's less than the company's $210 million in cash. And even with such a charge, Osur said her target price of $33 would still reflect an adjusted price-earnings multiple of about 20 -- still less than the target range of 21 to 29 times earnings for video game peers.

Even Take-Two's recent trading price of $23.99 is 15 times fiscal 2006 earnings -- a discount to the range of 21 to 33 times earnings for its peers, Osur pointed out. "We think that the discount is overdone," she concluded.

Wedbush Morgan Securities analyst Michael Pachter, meanwhile, noted that the FTC investigation could mean more legal expenses for Take-Two, but suggested they should be viewed as one-time charges.

Pachter maintained that there's no case against Take-Two because deceptive trade practices require intent, a false claim and harm to the consumer.

Pachter said he believes senior management didn't know about the sex scenes and notes that the game was on store shelves for months before anyone even found them -- which makes a case for intent and a false claim difficult.

But "I really find it to be a stretch that the Federal Trade Commission is going to do anything about this," Pachter concluded. He has a buy rating on the stock, and his firm doesn't have a banking relationship with Take-Two.

Still, the company could have handled the sex scenes better, Pachter acknowledged. "Yes, they

management should have known because this is their flagship brand," he said. "So to protect the franchise I think it would be appropriate for them to have better controls."

Indeed, in its press release late Tuesday, Take-Two said it plans to take steps to avoid making the same mistakes again. "Going forward, the company will refine the process by which it edits games and will enhance the protection of its game code to prevent such future modifications," Take-Two said.