Hi rsaulitis,
I've analyzed the ProcMon trace you took. Unfortunately, the collected stack traces don't have FlexEngine.dll (that happens sometimes, for reasons unknown) which made it a bit harder to troubleshoot.
But even without those extra details: for each of the folders that need to be redirected, FlexEngine performs exactly the same Windows calls. Windows performs exactly the same additional calls behind the scenes. It's just that the Windows function that takes care of the "Desktop.ini" file for some reason (file server, antivirus interference, ?) gets a different result code for the "Downloads" folder, which means that it won't create that file, and DEM subsequently logs that "redirected successfully, but error initializing" message.
("CreateFile" in this case tries to create the directory on the UNC path; "NAME COLLISION" corresponds with "folder exists", which the calling code can deal with successfully.)
I'm not really sure how to proceed, I'm afraid. If you don't mind, could you try a few things for a test user?