I was thinking some more about this last night... now, while the story as told is frankly preposterous, there may be a kernel of truth in it. It could be a very distorted version of the experiences of the Confederate submarine
Saint Patrick.
The
Saint Patrick appears to have been constructed at Selma, Alabama (although it's equally possible that she was built on site near Mobile, or even shipped by railroad from elsewhere in the Confederacy) under the direction of a man named Halligan. Catesby Jones, the commander of the Selma naval works, telegraphed in November 1864 that the torpedo boat was still not ready for service; but by early 1865, the
Saint Patrick was in the water near Mobile. Senior naval officers became suspicious that Halligan and his associates were intentionally prolonging the time needed to get the boat ready for service in order to avoid the draft (while they were working on the boat, they were exempt), and they were removed and the boat taken over by the Confederate Navy.
When combined Union forces attacked at Fort Blakely and Spanish Fort at the head of Mobile Bay in March 1865, the
Saint Patrick appears to have made an unsuccessful attempt to sink the wooden gunboat USS
Octorara; the spar torpedo was placed against the gunboat's hull but failed to detonate. However, within the next few days, the Union lost three ships to torpedoes, including the riverine monitors USS
Milwaukee and USS
Osage. They were lost in an area that had been considered cleared of torpedoes, but the standard (and most likely) explanation is that there were freely-drifting torpedoes in the area that had either been deliberately launched or had come adrift from their moorings. Still, the loss of three vessels in just a few days seems rather suspicious, and there has been a minority theory that the
Saint Patrick may have been involved.
It's possible that, not knowing of the later naval operations in Mobile Bay, this became garbled and grafted on to the much more famous Battle of Mobile Bay on August 5, 1864, and connected with the monitor sunk on that occasion, rather than the two sunk later on.
ETA Some more about the
Saint Patrick here:
http://civilwartalk.com/threads/c-s-s-st-patrick-torpedo-boat-submarine.6152/