Yes I have seen this happen before, a couple of times. From what I understand the convoy takes its "Icon" from the lead ship in the convoy, so if it is an enemy merchant ship, it will be a red square, and if you see a Big blue circle like you describe, it doe sindeed mean that there is a AI U-boat ahead of the convoy, the game then interprets the U-boat as being part of the convoy.
Yes I would also see it actually do something about being in such a prime position, but I never have
There was a post about this a year or two ago, but I cant find it, if i do, will post a link.
EDIT: Ok, here is one that explains it nicely
http://www.subsim.com/radioroom/show...ht=blue+circle
and a couple to show that it is not that unusual :
http://www.subsim.com/radioroom/show...ht=blue+circle
http://www.subsim.com/radioroom/show...ht=blue+circle
http://www.subsim.com/radioroom/show...ht=blue+circle