The bubbles are from HP air bleeding into the ambient chamber, and bubbling out as the pressure in the chamber equalizes with ambient pressure. This is how IP is maintained at a given pressure above ambient, with a nice dry chamber. Lets say at the surface the IP is 135 PSI. At 33 ft, it needs to be about 150 to stay 135 above ambient, at 66 ft 165, etc....the air bleeding into the chamber ensures this. If you noticed the bubbling stopped, it meant that air was no longer equalizing pressure in the ambient chamber, and if you then went a bit deeper, the IP would not rise with the change in ambient pressure, or at least would rise more slowly. This would definitely cause more difficult breathing in an unbalanced 2nd stage, which I'm sure the sherwood is.
The wet breathing is probably unrelated, except if, as you mentioned, you're really sucking on it and you pull enough of a vacuum to draw some water in. I guess it's possible, but likely just coincidental.
There is no way water is going to get into the breathing gas path in the 1st stage, unless it comes in from the tank. There's HP air in the 1st stage, any leak will result in violent bubbles of air escaping, not water leaking in. The only place water can enter a pressurized regulator is in the 2nd stage where the air is at ambient pressure.
Sounds like you handled the situation well. Another example of regulator 'failure' not resulting in death!
