I don't think it's illegal by any stretch, but it is inappropriate and shouldn't be tolerated. Students depend on professors' recommendations for clerkships and jobs after graduation, not to mention the appearance of impropriety in grading. And if the professor is a dean, there's a disciplinary/administrative role that adds to the inappropriateness.
That said, it's hard to know whether this is just a rumor or not, but google does show that an associate dean at Dickinson was named as the dean of a lower-tier law school in the Midwest in February - so the timeline does appear to match up.