I am not an expert, and I am very new to this forum and to owning a dog. However I would like to offer some advice, please know that my intentions are good and I want what is best for both your family and the dog.
First of all I would like you to imagine what life is like for your dog, put yourself in his shoes. Imagine you have been passed from pillar to post in your 4 short years, never having a truly loving home. Then one day, you are introduced to a family who are very loving and give you the best home you could wish for. The next day, strangers come to your home, the other dogs are going crazy, you dont have a clue whether this is a threat to your new family, a threat to you, or someone trying to take over your territory. you also dont know if it is simply friends or family of your new owners.
German shepherds are known for their loyalty and courage, it only makes sense for them to become defensive when they are threatened. As humans, we understand what is going on, but dogs dont, so they react, rather than logically thinking about the situation.
I would now like to offer some advice for helping you with this dog, First of all establishing yourself as the pack leader, so your dog doesnt feel he has to.
1. NILIF - Nothing In Life Is Free. I think a good way to show your dog that you are the pack leader is to feed them yourself, this shows them that YOU are in charge of supplying their food. Along with this comes making them work for their food, you said that your dog knows sit, down and stay. tell him to do this things before giving him food, and dont give him it all at once, make his meal a glorified training exercise, thus showing him that you have the authority and not him. Use this to teach him new tricks at the same time, so that this does not become monotonous.
2. Shut down - as mentioned, a shut down is a good way of slowly introducing your dog to new things. Whatever method you use, be consistent, and do not overwhelm your dog, thus bringing him to a heightened state of excitement. Try keeping him indoors for a few days and slowly allow visitations, first by using the same person, for example your sister as she is not afraid of him, and then as his exitement for visitors drops, introduce other people. This may be a difficult task as you should ideally spend a few days on this and as we know that is not always a viable option, but give it a try. use calming and distraction techniques, along with rewards for good behaviour.
3. Keep him leashed AT ALL TIMES. I believe this is a follow on from the shut down theory, what we are teaching the dog here, is that YOU control where he goes, he has to look to YOU for direction, thus promoting yourself to pack leader in his eyes, and removing the need for him to "Protect" you.
4. Herding, This I would like to hope would calm down once the dog learns his place within the family, but if it doesn't, you could try a number of corrections. Set up a controlled environment in which your dog may think about "Herding" your daughter. Have your daughter walk the path she would normally walk and then as soon as the dog looks at her, and you think he might start herding, Firstly shout "AH, AH!" use in a firm, loud manner (Not too loud so your neighbours can hear, but loud enough so that he knows you mean business). At once your daughter should stop and stand still, ignoring any actions of the dog. If your dog listens to you and ceases the herding behaviour, praise him and give him a treat. keep repeating this exercise until the dog gets it. if the dog does not listen to you when you shout, then remove him from the environment so that he can think about what he has done to cause him to be away from his family.
Obviously the herding behaviour is of number one importance since you can deal with the rest, however hopefully by following the advice i have offered, you should see a change in all of these areas.
Dogs are very smart, (especially GSD's) if they are shown that there is nothing to be afraid of, then they will usually settle in nicely, but this does take time, and patience.
The advice I have offered has come from books and other trainers experiences working with dogs, if they do not work, along with some other ideas posted in this thread, please seek advice from a PROFESSIONAL trainer, rather than a vet, when it comes to behavioural issues. also please do not take, one persons opinion, have the dog checked out by a number of individuals, before making any decisions. It may be that the dog is completely healthy and simple needs time and socialisation, or or may mean that the dog has serious psychological issues that can never be resolved.
I look forward to hearing how you get one with your dog