The shares they bought were just to cover their short position. They didn't loose a bit, they just didn't profit even more (which they would if the share price would go up).
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.