OP your daughter handled it beautifully. As did you and your husband (and kudos for your husband to make the decision not to apologize, backing your daughter up)
I don't know Gary, so obviously I can't say if he's creepy or not. But my dad is similar to Gary. Loves kids, an affectionate man and just does not get the fact that some kids don't like to be touched by adults and that when they push kids boundaries that it comes off very, very badly. (not in that way, but hugs, teasing like Gary did) It took a long time for my mum and I to get across to him how wrong it looked and that while WE know he would never do anything, parents are going to err on the side of caution. He's gotten a lot better, will roughhouse with the kids but now knows to read the signs that they've had enough, and will back off.
OP I wouldn't approach Gary unless it happen again. (I know he repeated it, but based on what it was and the fact it was not addressed at the time, I would leave it be for now) If it does then I think you and your husband need to approach him and tell him that while you know he's not meaning anything by it, your daughter is uncomfortable and has given him all the cues he should require to stop doing it. (telling him she didn't find it funny, moving away from him when he tried to repeat it) As he's continued this is you and your husband telling him to please stop touching your daughter, even as a joke.
I would also have your daughter tell him (if it happens again) to say "please stop touching me' and then repeat that should any disagreement happen.