The California State Teachers' Retirement System (CalSTRS) has at least $500 million invested in the company that manufactured one of the weapons used in the Newtown, Connecticut, massacre of 20 children and six adults.

The investment, which CalSTRS officials say is being reviewed, appears to fly in the face of its longstanding investment policy that frowns on taking a stake in companies whose products could have negative social and legal ramifications:

“Non-economic factors will supplement profit factors in making investment decisions. . . . The consideration of non-economic factors is for the purpose of ensuring that the Retirement System, either through its action or inaction, does not promote, condone or facilitate social injury.”   

CalSTRS, which manages $155 billion in assets, is the second largest pension fund in the country. As of March, the fund had invested $751.4 million with Cerberus Capital Management LP, which bought gun manufacturer Bushmaster in 2006 and merged it with other weapons companies to form Freedom Group.

CalSTRS invested in at least three funds controlled by Cerberus, a private equity management company, between 2003 and 2008. Funds of this type are generally illiquid with set terms that can last a decade, and are difficult to withdraw money from without finding a replacement investor.

California Treasurer Bill Lockyer asked CalSTRS and the California Public Employees’ Retirement System (CalPERS) to review their holdings and give him an accounting of any investments they have in gun makers.

“The bottom line is neither PERS nor STRS should have any investments in the makers of guns that are illegal in California, especially when those guns have been used to kill 20 innocent children and six innocent adults,” Lockyer said, referring to the shooting spree at the Newtown elementary school last week by Adam Lanza, who was armed with a Bushmaster AR 15 assault rifle and two handguns. Lanza killed his mother before going to the school and killed himself afterward.

–Ken Broder  

To Learn More:

The Money Behind the Newtown Massacre (by Dan Primack, Fortune)

Gun Company's Shares Are in Line of Fire (by Tiffany Hsu and Marc Lifsher, Los Angeles Times)

CalSTRS Teachers' Fund Reviewing Private Equity Gun Investments (Reuters)

California Teachers Pension Fund Tied to Gun Maker by Investment (by Chris Megerian, Los Angeles Times)