Q: May the photo of a nonfamous person be used as an avatar? The terms of use state:

Under no circumstances will Subscriber use the Network or the Service
to [...] (c) create a false identity or to impersonate another person

Since there are many avatars of live action fictional characters, I guess it is ok to have a celebrity as an avatar. More so if dressed as one of the fictional characters they portray.
I've also seen several avatars which are the photos of little babies. It is most likely also fine since nobody is going to be thinking that such toddler would be posting on Stack Overflow.
But I've also faced the case of an user with a photo of a non-famous person which I mistakenly thought it was her photo. Furthermore she talked in chat, pretending to be a different person than later was revealed he actually is.
I made a Google image search to make sure that such an avatar is not a niche celebrity. Should I report such a case? Does it matter if the avatar user has consent from the person depicted in the avatar photo?
Edit: I've reverted my avatar back to my old one. Looking like Glorfindel is great, but unfortunately it was causing people to get the wrong impression. I am not asking about a user taking the avatar of another user or moderator. I am asking about using the photo of another random person. Who may be a member of Stack Overflow, but most likely is not.

A: Using somebody's photo does not mean by itself that the user claims to be the person in the picture. It's understandable though that you make the connection (human minds work that way). 

Furthermore she talked in chat pretending to be a different person than later was revealed he actually is.

That's coming into the territory of "create a false identity or to impersonate another person" as described in the Terms of Service. It will depend on the severity of the matter if any action can be taken against that user. If it's John Doe posing as Jane Smith, I would just ignore them (there is actually an ignore function in chat). If it's really serious, e.g. someone falsely claiming to have authority on a certain matter, consider casting a chat moderator flag on one of the messages in the conversation. 
As always, remember that On the Internet, nobody knows you're a dog.
disclaimer: the picture underneath this post really is me (a few years ago, of course)

A: I guess the important thing is the possibility of passing yourself off as someone else, and the potential confusion.
Someone tried it with my ava (which admittedly is SE famous...) and people were irate, and I was in the amusing situation where... I missed all of it. 
The difference with having a ava of someone famous, and a regular user, mod or otherwise is there's a reasonable chance of confusion. 
Even if its a past avatar, someone might still get confused.
I'd add this is even without any other issues. if you're using someone elses ava with the intention of causing trouble, this might compound things.
so... might be a great idea to change your ava back from the user you're imitating. 
I'd also add the editing (and reediting) your posts to meet the criteria of the CC licence can be onerous - bulk edits may be seen as vandalism, and you're essentially adding a signature, which we disallow on posts here. Might as well just have a unique avatar of your own. 

A: I'd see this a very grey area.
You are not claiming to be someone else, but at first glance you could be confused with them and while the confusion could be quickly cleared up it's unnecessary in first place.
Using the avatar of a moderator is straying further into "don't do that" territory. Again, there appears to be no malice or duplicity, but you are spreading more confusion - especially in chat where full names aren't always shown.
If this happened on a site I moderate and it was brought to my attention I would seriously be considering resetting the avatar by this point.
Of course, this is all ignoring the question of "why would you do that?". I can see why people might want to use celebrities or actors in certain roles as their avatar, but a random stranger off the internet? That doesn't make sense to me and you are already setting off alarm bells in my (possibly over-suspicious) mind.
Though if the moderator is using a non-personal image (e.g. a flag or other symbol) then it becomes harder to make the call. Because in that case there can be valid reasons why someone else would want to use that image (e.g. they're from that country).
Now if you were to change your name to "Glorfindel" as well, that would be something else entirely...
