For example, a dojo opened up down the street from mine with an instructor who gave himself a Black Belt. He was a Green Belt in his art but wanted to open his own dojo. I could call him a fraud, but he ended up becoming a very legitimate martial artist, including a multi-time tournament champion and successful dojo owner.
It definitely happens.
By the normal standards for assessing martial arts "phonies", Helio Gracie and his brothers could have definitely qualified. Carlos Gracie got no more than two years of instruction from either Mitsuo Maeda or one of Maeda's students. (The family says Maeda, but the time line suggests a student.) There is no record I know of that Carlos was actually awarded any formal belt rank from Maeda. Carlos's brothers (including Helio) learned from Carlos.
This limited instruction and lack of formal rank did not stop Helio from publicly claiming that he and his brothers were the only legitimate jiu-jitsu instructors in Brazil. At the beginning of his fight career, when his record was 0-0-1, he claimed to be the undisputed, undefeated Jiu-Jitsu champion of Brazil. When Judo started making significant inroads in Brazil, Helio claimed that Judo was nothing more than a watered down version of Jiu-Jitsu created to fool Westerners and that his family was the only Brazilian source of the real traditional Samurai art. (Later on, after his brothers died, Helio changed his tune and claimed to be the person who had single-handedly created BJJ by improving Judo to be more efficient and use better leverage.)
We'll not even get into the many examples of shadiness in the personal and business lives of the Gracie brothers.
If this was the whole story, then Helio and his brothers would be just another example of the dishonesty which often seems rampant in the martial arts world. But they did more than just making sketchy, grandiose claims to promote their art.
Starting with that minimal level of instruction, they trained their asses off. They taught lots of students and did lots of sparring in class on a daily basis. They engaged in plenty of challenge matches with other martial artists - in the ring, in the dojo, on the street, on the beach. They picked the brains of other martial artists they encountered and stole any concept or technique which they found useful. They produced a ridiculous number of offspring and trained them (at least the males) from an early age to be fighters and competitors and teachers.
The result - a sophisticated and highly effective martial art and a family of top-notch professional martial artists. (The Gracies were not solely responsible for the creation of BJJ, but they played a huge role in both the technical development and promotion of the art.)
As a BJJ instructor, I'm most familiar with the history of my art, but I've read things which suggest a similar process has played out in other styles as well.
