Their cronies (and often the bankers themselves) take large amounts of the IPO shares.

So when you refer to 'ibankers' as a group, you mean 'ibankers who steal from their employers'? Isn't this a distinction you ought to make? And doesn't your previous statement make sense if you were merely uninformed?

I might be uninformed here, but don't the underwriters of public share offerings often also hold on to blocks of shares after the offering (completely legally)?

They only do that if they can't sell the stock. The point of underwriting is to sell all of the shares as quickly as possible. If your argument is true, it's not just a reason to avoid cheap stocks -- it also obligates you to avoid deals of any sort, since exactly the same inefficiencies exist.

I see. So an underpriced offering actually avoids the underwriters holding the stock- since there is obviously demand. I was under the impression that during the dot-com boom, a lot of the underwriter banking organizations were buying their own underwritten shares at IPO prices and benefiting from the early upswings (basically, arbitraging the lower offer prices).

They certainly do distribute it to favored clients if it's a hot IPO, but they have to balance the needs of clients and issuers: from what I've heard, that meant that you could only get in on a good IPO if you also bought into some less exciting ones. It's not like an investment bank can consistently screw one kind of customer without driving that kind of customer to another bank.