You mean they would profit more if the price would go *down? The way I understand it, you make money on a short when the price goes down because you can buy back the shares you shorted at a lower price.

No, see the link in the comment below. If the shares go up, the underwriter can close his short position by buying a number of shares from the IPO company, at the IPO price (which is below the market price), therefore effectively profiting.

I don't think it's legal for an underwriter to short the price of a security that they're bringing to the market.

That's simply not true. The SEC allows this behavior to stabilize the price.

http://en.wikipedia.org/wiki/Greenshoe