Michael was crushed when Fredo confirmed that he was the traitor with his gaffe at the Superman show. But I think Michael suspected him before that. Check out the hard, penetrating looks Michael gives Fredo in his hotel room when Fredo asks if "anyone I know" is in Havana. Ditto when Michael "introduces" Fredo to Johnny Ola.
As for "Superman": there really was a Superman sex show in pre-Castro Havana, featuring a well-endowed guy. Like everything else in GFII's Cuban scenes, it's totally authentic.