Was it Facebook that used someone's photo of themselves in an advert - claiming that it fell under "we can use your images for any purpose" ?

I suspect you are misremembering either a real story about an advertiser using someone's photo without permission or rumours based on it that occasionally become popular.

An advertiser once, against the FB terms of service, used a user's profile picture in their advertising. The advertiser was banned from the platform. Here's a news story that might jog your memory on this: http://mashable.com/2009/07/17/facebook-dating-ads-2/

Looks like you're absolutely correct - there's FB blog post from a while back talking about how this is something that they will not do: http://blog.facebook.com/blog.php?post=110636457130

That sounds about right. I'm not intimately familiar with FB's terms of use - I'm not sure if there is some differentiation between how they can use your other content and how they can use your profile / profile photo, etc. I haven't heard of Google doing anything like that though, but then their advertising model is a bit different.