Sorry to hear about your experience. Bad LCC service at its worst!
However, from Sterling's point of view, you didn't have to sleep at the airport (there's a very good train link to the city centre), you didn't have to fly directly (it's not Sterling's concern that you had a connection) and you don't offer any proof of the airfares available on the day. Why should they believe you?
261/2004 has proven to be an all but useless piece of legislation. The big loophole is the 'security' one, which many airlines (successfully) used as a get-out clause for mechanical failure (a mechanical failure, after all, renders a flight rather insecure). In addition, the compensation is at (IIRC) set levels.
You could get the Danish civil aviation authorities involved if you believe that 261/2004 isn't being properly enforced, but beyond that, I don't think hiring a lawyer is going to result in much more than legal fees. Sorry
