They were down in Texas on business, walking through historic San Antonio, when the call about King Tone came on the priest’s cellular phone. Tone, born to the world Antonio Fernandez, was then leader–or “Supreme Inca”–of the Almighty Latin King and Queen Nation street gang, and he’d been busted, again. He’d punched his old girlfriend in the face, giving her a black eye in front of her 11-year-old daughter, and violated his parole, according to the 1997 charge. He was locked up and needed $5,000 bail.

The priest, Reverend Gordon H. Duggins, had come to know Tone and many other Latin Kings gang members. He’d hired them too–some off the books, some on–to work security and operations for the homeless shelters and single-room occupancy (SRO) hotels that he and G. Sterling Zinsmeyer run through Praxis Housing Initiatives, one of the city’s largest nonprofit providers of housing and social services for homeless people with AIDS.

Tone was never on the Praxis payroll, though occasionally he’d sign petty cash slips at Praxis for $150, or Duggins would borrow money from employees to buy him suits for his court dates. At the time, Tone had publicly promised to transform the Kings from a band of drug dealers, with a reputation for violence, into a respected and charitable organization. Duggins believed that promise, and was willing to foster the gang’s altruistic transition–at any price, it would seem.

Rather than reach into their own pockets to spring the gang leader, Duggins and Zinsmeyer–who each made $120,000 in salary that year–dipped into the coffers of their nonprofit, at the expense of their clients and the public.

To help Tone out of his latest legal jam, Duggins, Zinsmeyer and Praxis’ then-comptroller, Hugo Puya, ducked into the historic Merger Hotel, only yards away from the old Alamo battlegrounds, and penned a fax. “Funds need to be transferred directly out of Praxis Chase bank account and directly transferred into Mr. Ronald L. Kuby Chase account,” read the note, signed by both directors. A letter dated that same day from Kuby, Tone’s pro bono attorney, confirmed receipt of the transfer and money used for Tone’s bail.

As documents obtained by City Limits reveal, Tone’s bail is just one item in a lengthy list of questionable expenditures the Praxis executives have made since they founded the group eight years ago. In mid-February, following a report in City Limits Weekly, these spending practices caught the attention of the city Department of Investigation, the state Attorney General and the Inspector General at the federal Department of Housing and Urban Development, all of whom are now examining the organization’s financial records. Nearly all of Praxis’ $7.4 million budget comes from city, state and federal funding streams, and investigators are trying to figure out where taxpayer dollars are going.

“We’re looking at how the money was spent, and we’re taking this very seriously,” says HUD spokesperson Adam Glantz.

Among the more curious enterprises is a string of stealthy for-profit homeless hotels that Duggins and Zinsmeyer have set up under the Praxis umbrella. Tax returns and internal company memos show that the directors arranged for hundreds of thousands of dollars to be siphoned from the nonprofit to start up and support their private housing enterprises–unbeknownst to the Praxis board of directors, or to the Internal Revenue Service.

“It’s a huge scandal,” says founding Praxis board chair Cyril Brosnan, who resigned last summer after years of “disgust” and “frustration” with the executives’ financial decisions and their failure to disclose information. “We were never told about a for-profit. We were never really told about anything,” says Brosnan, who has sat on the boards of a number of nonprofit health service groups. “They should be hung by their toes.”

In an interview, Zinsmeyer, 55, admitted that blowing nonprofit dough on the bail, for one thing, was a mistake. “It should have never happened,” he says. He claims that all money borrowed from Praxis for both the bail and the for-profit shelters has been paid back. (He offered to provide documentation, but failed to return repeated phone calls to follow up.) “By now I think we’ve made all the mistakes you can make in this business. But that’s how you learn.”

Duggins declined to comment for this story. But his patronage of Tone didn’t end that day at the Alamo. Five months after Tone’s assault charge, which was later dismissed, police and FBI agents arrested Tone in a citywide drug raid and charged him with conspiring to deal heroin and cocaine. Duggins came to his rescue again, dropping another $5,000 in bail–this time in cash. It’s unclear where that money came from. Caught selling drugs on videotape, Tone was forced to plead guilty. He’s now serving a 12-year sentence in a maximum-security federal prison in Terre Haute, Indiana.

“I made a fool of myself,” Duggins said in a New York Times profile in 2001, about putting his faith in Tone. “But I would rather have stood for him as a fool than failed him as a friend.”

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As a nonprofit organization with tax-exempt privileges, Praxis is bound by fiduciary duty to pursue reasonable and fair-market spending practices that support the group’s mission. However, since their first year in operation, both Zinsmeyer and Duggins have broken the Praxis piggy bank for other causes, including personal items and gifts, their for-profit housing ventures, and the businesses of family members, records show.

Before the Christmas of 1997, for instance, Duggins took the Praxis credit card on a shopping spree, dropping $968.85 at Toys”R”Us, the majority going toward PlayStation video games. That same day at Macy’s, he also charged nearly $1,000 on men’s designer clothes–Nautica, Tommy Hilfiger, Polo–including jeans and slacks ($500), and more than $175 in men’s underwear. Receipts also show he bought $625 worth of home heating fuel and spent $347 at a Gulf gas station near his home in Connecticut.

“Gordon couldn’t stop spending on the Latin Kings,” says former Praxis bookkeeper George Serrano. While it’s unclear where the toys went, Serrano claims that Duggins and some of the Kings returned to the office that day carrying Macy’s shopping bags and sporting new clothes with the Macy’s tags still on. “He’d take all the petty cash he could, ask if he could borrow money personally, anything we had in our wallets. He promised to pay us back and he never did. It wasn’t like we weren’t paying him–we gave him $120,000 in salary.” Last year, in addition to their for-profit ventures, the execs also took a salary raise, Duggins pulling down $135,231, and Zinsmeyer making $149,539.

The nonprofit’s spending power has also gone to support family members. The health and worker’s compensation insurance Praxis offers its employees are both purchased through AMCORP, a San Antonio–based financial services company owned by Zinsmeyer’s brother William, and his nephews, Vincent and Craig. The Internal Revenue Service requires nonprofits to disclose any business with family members on their tax returns, which Praxis has neglected to do.

“It was hardly a fair-market deal,” says former Praxis comptroller Hugo Puya. “It would have been at least 25 percent cheaper to go straight through the insurance providers. But when it comes to family, ‘cost-benefit’ becomes a different type of analysis.”

There’s also Duggins’ own personal business interests. Some of the furniture in Praxis’ shelter rooms was purchased from Woods Edge Resources, a consulting company that he owns and runs out of his home in Bethlehem, Connecticut. To make the dressers and bureaus, he set up a wood shop in his garage and hired a carpenter.

“That was just an experiment,” says Zinsmeyer, adding that it was quickly aborted.

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Other businesses continue today, though, including their most lucrative: a cluster of for-profit homeless shelters and single-room occupancy hotels that the execs have set up through separate holding companies.

For $90 or more a night, the city Department of Homeless Services (DHS) sends single adults and families to the Dawn Hotel and Heights Residence in Harlem, the Bronx’s Park Overlook, and Pacific Place and Pacific Dean Residences in Brooklyn.

While Praxis manages these facilities–and some have been misleadingly advertised on Praxis newsletters as part of the organization–they are actually controlled by Duggins and Zinsmeyer, who split the company shares evenly, according to state and tax records.

It’s by no means unusual or illegal for nonprofit groups to set up for-profit subsidiaries. It gets dangerous, however, when their funding streams mingle to benefit company executives and those executives do not disclose that information, say lawyers and accountants.

That’s what’s happened at the Dawn Hotel. According to an internal audit of the Dawn from 1997, at least $173,000 was drained directly from Praxis–in the form of “non-interest–bearing” funds–to get the for-profit hotel renovated and running.

“That’s a pretty risky venture,” says Marc Owens, former head of the IRS’s tax-exempt organization division. He says that type of loan might violate certain fair-market laws. “Who borrows money with no interest? That’s a diversion of assets, an excess benefit transaction.”

Accounting records from the Dawn also show that at least some of the money being diverted to the for-profit hotel came from federal funding intended for renovations and social services at nonprofit Praxis shelters. Between 1996 and 2002, HUD awarded Praxis $4.7 million to run Riverside Place, a single-room occupancy residence on the Upper West Side. According to the Dawn’s 1997 general ledger, the execs transferred $137,000 from the bank account of the Riverside to the Dawn in just 48 days.

That same year, at least another $300,000 of Praxis’ money was put into the for-profit Latham Hotel, according to confidential letters written by Zinsmeyer to Praxis’ primary counsel, Dwight Kinsey (who also serves as counsel to the Dawn, and last year was named chair of Praxis’ board). The Latham eventually tanked.

“It’s like a shell game in the park,” says Puya, who as comptroller had regular access to the organization’s books and records. “The money went from the pockets of taxpayers, through the nonprofit, and finally into the pockets of for-profit bank accounts controlled by both directors.”

Apparently, the directors never told the IRS that these side businesses even existed. According to Praxis tax returns filed from 1996 through 2002, when asked if the nonprofit “ever engaged in the lending or leasing or transfer of assets with for-profit companies that may have the same directors, key officers or officials as the non-profit,” accountants routinely checked “No.”

“That’s huge,” says Fred Rothman, former chair of the Tax-Exempt Organization at the American Institute for Certified Public Accountants. “It’s absolutely verboten to take money from the public to furnish a private interest. And to not disclose is troubling–[it] begs the question, ‘Why hide?'”

Praxis’ accountants at the time, from the firm of Urbach, Kahn and Werlin (who also handled the books and audits for the Dawn), say they no longer do business with the organization and would not comment on their audits.

Asked why restricted public funds were transferred into Zinsmeyer and Duggins’ private businesses, Amy Millard, an attorney for Praxis, would only say in a written statement, “We’ve been cooperative with all investigators and continue to do so. We’re confident that it will be proven that Mr. Zinsmeyer and Mr. Duggins have provided an important service to the community and are dedicated towards the community they serve.” She did not return numerous phone calls for further comment.

It’s a New York story from the beginning. Born in old-line Texas, Glenn Sterling Zinsmeyer was outed for being gay at an early age, he says, and left home as soon as possible. According to his résumé, he graduated from the University of Texas, worked as a staffer in the Kenyan parliament, and was later ordained as a minister at the Church of Spiritual Science. (Asked if Zinsmeyer had ever graduated from the University of Texas, the registrar there said he had not.)

When he moved to New York, he started working low-level jobs in Chelsea bars and restaurants. As the AIDS epidemic grew in the gay community, Zinsmeyer found new passion in activism and local politics. In 1996, he became president of the Stonewall Democrats, a gay and lesbian political club.

While Zinsmeyer was in college, Gordon Duggins was finishing up at Duke University, and went on to earn two Master’s degrees from Harvard Divinity School. He, too, grew up in the South, raised in Winston-Salem, North Carolina.

Duggins trekked to Liberia, where he received his clergy papers. He later settled in Bethlehem, Connecticut, where he continues to live in a home complete with a private chapel, a $50,000 church organ and an office for Woods Edge Resources, his consulting firm.

In the early 1990s, Duggins was hired as a fundraiser by Episcopal Social Services (ESS), a 170-year-old social services group. It was there that he met Zinsmeyer, who was running the organization’s AIDS housing program.

In the summer of 1995, with complementary skills for running and raising money for AIDS housing, the pair decided to start their own nonprofit, Praxis, Greek for “turning ideas into action.”

ESS sponsored the idea, offering a $150,000 loan and free office space to jumpstart operations. That relationship didn’t last long, however. Only months into the operation, ESS’ director, Father Steve Chinlund, resigned from the Praxis board. According to board minutes from that time, he felt that the board had too many paid employees, which he saw as a conflict. He severed ESS’ official ties with the group. Chinlund could not be reached for comment.

While still calling Praxis the “housing arm” of ESS in their newsletters, Zinsmeyer, Duggins and a third director, Robert Peters, looked to raise money, acquire shelters and get contracts from the city to house clients. They occasionally resorted to desperate measures. In pulling together a board of directors, they failed in some cases to get the permission of people they claimed on paper as members. For example, Praxis’ first city contract lists Kenneth Lowry, director of Conflict Information and Dispute Resolution, as a board member, a position he denies ever holding. “I’m not on the board now and I never was,” says Lowry.

Knowingly filing false information on city forms is a serious issue with possible criminal repercussions, say city officials.

Meanwhile, Praxis struggled to get contracts. “We couldn’t get anywhere in City Hall,” Peters recalls. “We needed to get our foot in the door.”

They hired one of the city’s premier lobbyists at the time, Ray Harding. By the end of his first meeting with the Liberal Party chief at his offices at the law firm Fischbein, Badillo, Wagner and Harding, Zinsmeyer had written Harding a $15,000 legal retainer from his Praxis checkbook. Minutes later, with Zinsmeyer looking on, Harding picked up the phone and dialed then–Deputy Mayor Fran Reiter to request a meeting. Over the next few weeks, Zinsmeyer met three times with Reiter and Deputy Commissioner Steve Cymbrowitz from the city Department of Housing Preservation and Development, according to Reiter’s daily schedule book.

“We had instant access to City Hall,” Peters says. “Harding confirmed his reputation. He didn’t guarantee anything–but soon after, we had clients in the Saint Nicholas Hotel.”

Zinsmeyer’s political connections didn’t stop with Harding. While serving as president of the Stonewall Democrats–which under his reign made a controversial endorsement of Rudy Giuliani for mayor–he also befriended Gregory Caldwell, Giuliani’s appointee to head the city HIV/AIDS Services Administration.

During that time, Praxis was blessed with a number of housing placements from HASA. After only its first year, the group was running four hotels with city funding: the Riverside, the Greenpoint, the Saint Nicholas and the Dawn. The Barbour opened months later, and the Park Overlook and Lincoln Place in subsequent years.

“Nobody else was getting fed like Sterling–nobody else was even getting in the door then,” says Rick De Ariaz, a veteran HASA social worker. “Greg needed a political rabbi and that was Sterling. He’s extremely well-connected. He’s the 800-pound gorilla in this business and he wants you to know it.”

Caldwell, who left his post soon after Mayor Bloomberg took office, could not be reached for comment.

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Many of Praxis’ clients–the group claims to have 900 at any time–are debilitated with mental illness and drug addiction, and suffer from AIDS. In most cases, they need at least some of the counseling and intensive assistance for which government agencies pay Praxis $4.2 million a year in contracts.

The Mental Health and Research Association, a local nonprofit that administers public grants, gives Praxis about $760,000 a year for “harm reduction” services, which aim to decrease substance abuse, prevent relapse and offer clients individual care. The state Department of Health gives the group another $89,941 annually to fight drug addiction and help clients find permanent homes.

But Praxis financial records, as well as personal accounts, indicate that those funds have not always served their designated goals. Company balance sheets show that funding from HUD, MHRA and DOH was funneled into a number of Praxis’ operations. In 1999, for example, Praxis transferred $5,000 in Ryan White money into the account of a laundromat, owned by the organization, next door to their Greenpoint Hotel in Brooklyn. “The money was commingling everywhere,” says Puya. “Who was to stop them? Externally, there was very little oversight. Internally, there was less.”

A spokesperson for DHS would say only that his agency plans to cooperate with any investigation. The feds, for their part, thought their own audits were being handled properly. “Our working relationship with Praxis thus far has been satisfactory,” says HUD spokesperson Glantz, noting that the group’s required progress reports and audits on the Riverside have been good. Because of his agency’s workload, however, he admits that “a lot of oversight is based on trust.” Now, as an application from Praxis for another $1 million sits before HUD, Glantz says, “The matter is in the hands of our Inspector General. We’ll just have to wait and see.”

One former Praxis employee–a hotel manager–claims Duggins was able to convince the city and feds to continue their contracts by pressuring his workers to forge documents. “We would be told that in order for people to keep their jobs, these rooms have to be occupied and the rent has to be gotten,” the former manager says. Even if a client checked out, the manager claims, hotel employees would note on their records that the room was occupied, and that the client was attending social group meetings.

“We had clients that went missing for 90 days and more, and the city still paid for their rooms,” the manager says. “We even rented them out to transients during that time,” or used them for office space.

Meanwhile, says the manager, services were lost. “They had the money for these things. It just went other places. The clients suffered terribly.”

Despite promises, on-site nurses were never hired, says the former manager, and suicides and drug overdoses were not uncommon. Masks and gloves for handling the hotel’s garbage, which often contained virus-infected body fluids and needles, also were not provided, the manager adds. A doctor hired to treat residents was assaulted by a Praxis worker and left the job soon after.

At least once, an outside organization offered to provide Praxis with free services at the Greenpoint, but Duggins refused. “They were callous brutes,” says Chris Norwood, executive director of Health Force, a health services and advocacy program in the Bronx. “Nobody has ever turned down free service before. They actually forbid us to hold group meetings.” The reason? “Duggins told us the building was getting repaired,” she says.

In the meantime, clients fear not only for their health, but also for their safety. At the Saint Nick, “Ratliff,” who is HIV-positive and has been living in the Harlem shelter for about a year, claims the building’s security guards have been selling crack in the room next to his. He can hear them through the holes in his wall, he says. He adds that he’s been robbed three times, and says there’s no heat during the night, though the city has no record of heat violations there. Once he attempted to adjust the nozzle on his radiator, and the backed-up pressure shot the valve straight to the ceiling. “It almost took my head off,” he says.

Detective Walter Burnes of the New York Police Department confirms that there have been some disputes, burglaries and drug arrests at the Saint Nicholas, but adds that the number of complaints is not overwhelming. Ratliff sees it differently. “I’ve been to dangerous places,” he says, “but the people running this organization have no idea what the hell they’re doing. It’s a madhouse.”

A number of former employees, like the hotel manager, spoke to City Limits on condition of anonymity out of fear for their physical safety. A few claim they lost their jobs or were pushed out for raising concerns to Duggins about finances or hotel conditions.

Praxis did have at least one New York City police officer on the payroll. Moonlighting for the nonprofit, Officer Will Thomas of the 32nd Precinct in Harlem made at least $42,000 in salary at Praxis in 1999, according to the organization’s payroll records. Thomas was not available for comment. “Will was hired to keep a lookout at the shelters,” says Puya. “That way, if we had a problem with the clients, or the staff, we could call him first.”

It’s no secret that the bulk of Praxis’ hotel staff is made up of ex-convicts, many of whom at one time belonged to a gang. Soon after founding Praxis, Duggins created Make It Happen Workforce, a work-rehab program that hires two-time offenders to clean and guard the shelters. “They make the best staff,” Duggins explained in his New York Times profile two years ago. “They can give empathy professionals cannot give.”

Some ex-employees say there were problems, though. In an internal 1999 memo, then-Praxis CFO Chuck Scanlon wrote to Duggins and Zinsmeyer that cash deposits from the Greenpoint Hotel and the laundromat in Brooklyn were rarely made, and in the case of the laundry, “it appears more and more that someone is skimming cash from that operation.”

Puya says he confronted Duggins about these issues, and expressed concern that a few members of the Latin Kings had complete access–including keys–to the laundry’s cash register. “When it came to the laundry, both Gordon and Sterling told me that because the Kings had gotten a bad rap all this time, the least we could do was let them run the Greenpoint and the laundry,” says Puya. “Gordon did everything to help them, and it quickly got out of control. Money was always missing, and the missing money belonged to Praxis.” Praxis did not return calls for comment on this.

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Now, even the president has had enough. This year, Zinsmeyer has dropped his salary to $70,000, he says, and is splitting his time between his home in Santa Fe, New Mexico, and his condo at the Parc Van Dome near Lincoln Center. He says he plans to leave Praxis only once the investigations are finished, to quell any appearance of flight.

“Eight years in this business has been enough,” he says. “Was everything perfect? No. Did we make some mistakes? Yes. But the organization deserves to continue.”

Geoffrey Gray is a freelance writer who lives in Manhattan.