Updated to reflect New York Comptroller and California Treasurer comments.

NEW YORK ( TheStreet) -- Private equity firm Cerberus Capital Management said on early Tuesday it would sell its investment in Freedom Group, the owner of Remington Arms guns and Bushmaster Firearms International, the maker of the semi-automatic rifle authorities say 20- year-old Adam Lanza used in a Connecticut elementary school shooting on Friday that killed 26 people, including 20 schoolchildren.

The move comes just a day after the California State Teachers' Retirement System said it would review its investment in Cerberus, given the private equity firm's controversial holding of the gun maker.

"CalSTRS investment staff immediately began reviewing our investments in private equity funds managed by Cerberus Capital Management that are invested in the Freedom Group, which manufactures firearms," Ricardo Duran, a CalSTRS spokesperson said in an e-mailed statement. Upon that review, CalSTRS found it owned a 2.4% stake in Freedom Group by way of three private equity funds run by Cerberus.

The public teachers pension fund has $154.8 billion in assets as of Oct. 31, of which $751 million are overseen by Cerberus, the statement added.

We have determined to immediately engage in a formal process to sell our investment in Freedom Group. We will retain a financial advisor to design and execute a process to sell our interests in Freedom Group, and we will then return that capital to our investors," Cerberus Capital Management said in a statement released on Tuesday.

The press release also called the Dec. 14 Sandy Hook elementary school shooting a "watershed event that has raised the national debate on gun control to an unprecedented level."

While Cerberus defended its ability to make investments on the behalf of its limited partners that fall outside of national policy debates such as gun control and the Second Amendment, it nevertheless identified a sale of the firm's Freedom Group holding as an action to take in the wake of the tragedy.

"Our thoughts and prayers are with the families and communities impacted by this tragic and devastating event," Cerberus added at the statement's closing.

Cerberus acquired Bushmaster - the manufacturer of the assault rifle alleged to have been used by Lanza - in 2006. In 2007, the private equity firm bought Remington Arms for $118 million, in a move that precipitated the formation of Freedom Group, a holding company with businesses that also include the sale of ammunition. The Bushmaster AR-15 rifle was used in a mass shooting in Aurora, Co., earlier in 2012

As of the third quarter, Freedom Group has earned net sales of $677.3 million in 2012, a 20% year-over-year increase. Roughly 60% of Freedom Group's revenue comes from gun sales, while the remainder is attributable to the sale of ammunition.

On Tuesday, sports retailer Dicks Sporting Goods ( DKS) said it would stop selling rifles in its stores. The Nation reported on Monday that Wal-Mart ( WMT), the largest gun retailer in the U.S. by sales, has removed the Bushmaster Patrolman's Carbine M4A3 Rifle that Lanza is alleged to have used from its online retail website.

In an interview with TheStreet, California state Treasurer Bill Lockyer said he's asked the state's pension funds -- CalPERS and CalSTRS -- to dispose of investments in manufacturers of guns deemed illegal in the state. "These guns are illegal in our state and we shouldn't be investing in those kinds of firms," Lockyer said, of assault rifles such as the ones manufactured by Freedom Group.

In 2005, Lockyer, the California attorney general at the time, sues Wal-Mart for thousands of state gun law violations such as selling firearms to prohibited individuals, or before they passed background or identity checks. Wal-Mart settled the suit for $14.5 million.

Other states appear to be revisiting policies on investments in gun manufacturers. "In the aftermath of Friday's events, New York State Comptroller Thomas DiNapoli has instructed his staff to review the Common Retirement Fund's investments in firearm manufacturers," said Eric Sumberg, a spokesperson for the comptroller, in an e-mailed statement.

The New York State Common Retirement Fund holds $150.1 billion in financial assets to which DiNapoli is trustee, according to the statement.

In Tuesday trading, publicly traded gun makers Sturm, Ruger ( RGR) and Smith & Wesson Ruger ( SWHC) fell sharply, falling just under 7% and over 10% respectively. Still, Sturm, Ruger and Smith & Wesson shares are up over 20% and 75% in 2012, respectively.

Vanguard is Smith & Wesson's largest shareholder with a 6.32% stake in the gun maker, as of Sept. 30 SEC filings compiled by Bloomberg. It is the third largest shareholder in Sturm, Ruger with a 7.03% stake in the company, the data show. BlackRock, the world's largest asset manager, is the sixth largest shareholder in both companies, according to the Bloomberg data.

Meanwhile, Cerberus isn't the only private equity fund with ties to the gun industry.

Another gun maker, Colt Defense is owned by private equity fund Sciens Capital Management. Meanwhile, another private equity fund, MidOcean Partners, controls Bushnell Outdoor Products, a maker of hunting accessories like scopes and magazines for lower caliber hunting rifles.

Cerberus Capital Management has over $20 billion in assets under management and was founded by Stephen Feinberg in 1992. Prior to Friday's school shooting, the private equity fund had drawn scrutiny from the New York Times for its holding of gun-related assets. The firms was also widely criticized for its roughly $7 billion buyout of Chrysler prior to the automaker's bailout.

During the financial crisis, Chrysler and another multi-billion buyout bet - GMAC received billion dollar bailouts from the federal government. While Chrysler's eventual bankruptcy wiped out Cerberus's investment in the automaker, the firm was reportedly able to break even as a result of a holding in Chrysler Financial, which was sold to TD Bank in 2010.

For more on Cerberus Capital Management, see why its founder said last year its multi-billion dollar Chrysler investment was a bad deal.

-- Written by Antoine Gara in New York

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