“You can make out two orange eyes and a white button nose. In the case of this “happy face”, the two eyes are the galaxies SDSSCGB 8842.3 and SDSSCGB 8842.4.”
From the ESA website for the Hubble space telescope.

The smile, however, is an optical illusion. The lines are actually arcs created by a galaxy cluster. Such phenomena occur when a very massive object (and galaxy clusters are the most massive objects in the universe) is located between the distant source of light and the observer. The object deflects the “incoming” light from its original path, thus acting like an enormous gravitational lens.

The smiling image is a special case of gravitational lensing, known as Einstein ring.
For a non-mathematical, beautifully illustrated explanation, see “Einstein Rings: Nature’s Gravitational Lenses” by Leonidas Moustakas and Adam Bolton. Here is a short version:

When light coming from a distant source (such as a galaxy) passes through a strong gravitational field (created, for example, by another galaxy), the light is deflected from its course. To an observer, that light appears “bent”, as if it passed through a lens. If the source galaxy, the “lens” and the observer (in this case the Hubble Space Telescope) are aligned almost perfectly along the same line, the light rays from the faraway source will be bent all around the lens, forming a full Einstein ring.

I thought that Einstein’s rings are called so simply because gravitational lensing stems from Einstein’s theory of General Relativity (which he published in 1915). In Einstein’s biography, Subtle is the Lord, Abraham Pais points that it was Isaac Newton who suggested that

“Bodies act upon Light at a distance, and by action bend its Rays.”

In 1801, the astronomer von Soldner calculated from astronomical data the scattering of light-particles by the Sun according to Newtonian scattering theory. Einstein, who did not know of von Soldner’s work, became aware that gravitation caused the bending of light in 1907. At that time, Einstein thought only of terrestrial experiments as a means of observation, and therefore concluded that these would be too hard to perform. By 1911, Einstein realized that deflection of light by the Sun could be detectable. The value he calculated was quite close to the one von Soldner found.

To form a gravitational lens, a distribution of matter (such as a cluster of galaxies) has to be located between a distant source and an observer. It acts like a lens, because its strong gravitational field bends the light from the source as it travels towards the observer.
According to Tilman Sauer (in A brief history of gravitational lensing):

“Einstein jotted down the basic properties of such a gravitational lens in one of his notebooks, presumably on the occasion of a visit to Berlin in April 1912… The notebook contains rough sketches as well as the basic formulae needed to describe the lens effect… At the time, Einstein must have concluded that the lens effect would not actually be observable. In fact, the angle between the two images depends on the mass of the lens object as well as the distances between source, lens mass and observer; it is exceedingly improbable for two stars to be aligned so precisely as to produce a double image observable from Earth.”

Orest Chwolson published a paper about the effect in 1924, but the concept did not receive much attention until Einstein published in 1936 a brief note on the subject, in the journal Science. In the note, Einstein presented formulae for the optical properties of a gravitational lens, which he had derived some 24 years earlier. After Einstein published, the topic was followed by a number of articles by well-known scientists.

According to Wikipedia, the first Einstein ring was discovered in 1988, and the first complete Einstein ring was discovered in 1998.

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