First of all, I am so sorry that you had to grow up in that situation. Hugs to you and your sis, and I am glad that you have been able to at least physically distance yourself from that situation (I know that the emotional and psychological repercussions must still be ongoing).
Second of all, even w/out the sniffing of the underwear and other perverted things I would say he is a creep. Men like that only pick women who are unable or unwilling to stick up for their children. His success (at w/e he is trying to do) depends on no one standing up to him.
If I were in your situation I would be angry and hurt w/my mother and would not have a good relationship w/her, if any at all. I would not trust her judgement w/ my own children either.
I would also advise the step sis to keep her children far, far away from that man, no matter the cost. I could not in good conscience allow my children to be around any person that exhibits the behavior you have described, even if he hasn't crossed to the touching line (that I knew of).
Worst case scenario, if something were to happen, your step sis would feel responsible bc she did not heed the warnings signs. Her child is worth hurting feelings if that would be the result of her not being around him anymore.
Best case scenario, she will at least save her child from the psychological repercussions of his treatment (like how he treated you and your sis).
The only people I want in my childrens' lives are those that have a positive impact. I don't care if they are family, if they don't add something positive to our lives I don't bother w/them. If they are impacting my life/my childrens' lives in a negative way then I keep them far away.
Once again, I am so sorry that you had/have to deal w/this man.
Wife to dh, Mommy to ds1 12/2002, ds2 9/2005, and ds3 9/2008.