Logic is on your side, dt, but logic often falls by the wayside when greed (or lust) enters the picture.
Michael was greedy--obsessed--with attaining legitimacy. Roth was the biggest player in casino gambling in the only places where it was legal at that time. When Roth told Michael that he could move Klingman out of the Tropigala, and become heir-apparent to Roth's Havana empire, I'm betting Michael let his distrust of Roth slip in favor of believing that the old man was just getting older, more tired, ready to step aside. Besides, Roth had no organization--just Johnny Ola.
As soon as the smoke cleared after the Tahoe shooting, Michael knew it was Roth. But before that, I fear to say, he was slippin'.