It happened once when I was arrested in Anvil. Once released you appear outside Anvil castle, in the small courtyard. I was amazed to find a Lich with some accompanying undead body guards, floating around and fighting with the anvil guard. Approaching the Lich, its label read 'King of Nenalata'.
Having now checked out Nenalata, its even more perplexing, since there is no special King of the old ruin. I play vanilla goty on ps3 - no mods. I've not seen this apparition since - must have been a one off glitch (or Lich, ha ha). Oblivion often does wierd things though, i guess its to do with the sheer size and complexity of the programme code - some command or action accidently triggers a normally unrelated code string.
Another example of this is when i visited the Tiber Septim Hotel, only to find one of those blue robed Heretics from the shivering Isles in there - and he recognised my char, launching an immediate attack on her.
Or like the time I exited the SI portal only to find Mirili Ulven from Highcross walking about on the cyrodiil side of the door and apparantly unable or unwilling to re-enter the SI.
The weirdness and unpredictability of such events are one of the recurring delights of this game IMO.