I'd consider it extremely underhanded, but it's definitely legal. Actually, you should be thankful that you saw this now -- you know what your competitor's values are, and what they may do in the future. I've been at a few startups across a few industries. In some, the competitors didn't care about each other, and everyone played by themselves. In others, we saw tactics similar to what OP describes.

You now know which bucket you're in. Plan accordingly. Don't put on your tinfoil hat, but keep this in mind going forward.

I'd also recommend bringing this to 500startups. I wouldn't consider them at fault here, but they should know that this happened to one of their companies. They should see if there's anything they could do in the future to curtail this. "Demo day" startups are at the most vulnerable point of their lifecycle, and something like this adds unnecessary complication.