I think you made the right decision. We could argue until the cows come home whether making a trade that you otherwise wouldn't have because you feel sorry for the other guy is "collusion" or not, but at the end of the day it's nearly impossible to police the motivations of owners making trades.
People make trades for a host of reasons that might not be SOLELY because they think it'll make their team better. Some owners like to have their favorite players, even if they know more valuable players are available. Is that "collusion"? Under the yahoo definition it probably is. But if so, half the trades made are then potentially "collusive." Other owners like to catch rising stars and will trade a better guy for a hotter prospect, even though they expect the hot prospect might not pay off until the next year (and thus "hurt" his team for the time being). And yes, I'm sure there have been thousands of trades in thousands of leagues where "feeling sorry" was the motivation at least in part.
IMO, trades should only be vetoed when they are ridiculously lopsided and where there is evidence of REAL collusion, such as a secret payoff or some other extra-league consideration. Needless to say, those circumstances are incredibly rare.
I am the Master. Don't question the Master. Just do what he says and be proud.