I could read one sentence in this page: https://www.google.com/adsense/support/bin/answer.py?hl=en&answer=48182 It is not legal, that's my opinion.
I don't know... it's not actually "misleading" as it's not telling you that those ads are part of their site. It's not actually telling you to click on the ads, and it's not covering up the "ads by Google" part. It seems borderline to me.