By Svea Herbst-Bayliss

LAS VEGAS (Reuters) - Some hedge fund managers and investors attending a conference here audibly gasped when the news flashed on TV screens that Raj Rajaratnam had been convicted on all 14 counts of insider trading.

"Wow, gosh. I don't know what to say," whispered a prominent industry executive.

The executive was responding to a person standing next to him who muttered: "Guilty on all 14 counts."

The aggressive use of telephone taps in the case and the breadth of the investigation has sent shudders through the industry in the past couple of years.

But some 2,000 miles from the Manhattan federal courtroom where the trial took place, others said they were not shocked by the conviction of Rajaratnam, who not so long ago was a billionaire hedge fund manager who mingled with the industry's biggest players.

Several people attending the Skybridge Alternatives Conference, one of the hedge fund industry's most prestigious events of the year, privately said they had long ago written him off as one of the $2 trillion industry's "bad apples."

Very few were prepared to talk for attribution and most soon returned to their main purpose at the conference -- networking and gathering tips from some of the hedge fund world's biggest stars.

Rajaratnam had once participated in a fantasy football league that included top hedge fund luminaries Paul Tudor Jones, Jim Pallotta and Stanley Druckenmiller.

Indeed, a number of former traders from Rajaratnam's now defunct Galleon Group once worked for Steven A. Cohen's SAC Capital Advisors. Cohen is the most high-profile speaker at the three-day conference.

Cohen's fund has drawn its own scrutiny from prosecutors. This year, two former SAC Capital employees pleaded guilty to insider trading while working for the $13 billion hedge fund. And while Cohen himself has not been accused of any wrongdoing, Reuters previously reported federal investigators have been looking into allegations of wrongful trading at SAC Capital for nearly four years.

Cohen's appearance at the conference is a rarity because he seldom speaks publicly or before the media.

Several people said they hoped Cohen, a billionaire in his own right, would address the controversy surrounding his storied hedge fund and he did not disappoint them. "Thank you for that softball question," Cohen said to gales of laughter when SkyBridge partner Anthony Scaramucci started off the half-hour-long interview by asking about the recent media glare.

"No one likes that kind of media scrutiny," Cohen declared, adding that the firm's roughly 850 employees "work hard and we take compliance very seriously. We will cooperate with any and all investigations."

Others in the crowd of over 1,700 managers, investors, industry analysts and lawyers talked about how Rajaratnam has indirectly impacted the industry as investors demand more information about how their managers plan to make money.

But the overall sense of many was the verdict would not alter things much for the hedge fund industry and would not represent the same blow to confidence as the Bernard Madoff Ponzi scheme did.

In the end, rigorous due diligence comes down to finding someone you think you can trust, said Gaurang Vyas with Nonpareil Capital, which invests with hedge funds.

"We need to find the right people," he added.

(Reporting by Svea Herbst; additional reporting by Matthew Goldstein in New York; editing by Tim Dobbyn, Andre Grenon, Gary Hill)