Your post is not clear whether your wife travelled to LAS on a paid ticket or using points. I'm going to assume that it was a paid ticket since you could have used IKK to get her a business class seat.

AC did change the rules on upgrading other people at check in a couple of years ago. In the past, the person you tried to upgrade had the same priority as you (i.e. a person with no status being upgraded by a SE would trump an E). Today it is based on the status of the person being upgraded. If your wife has no status, that means you as SE would be near the top of the list for upgrades but your wife with no status would be at the bottom. What the check in agent would have been telling you was that your upgrade would go through but that there are already too many status passengers looking to upgrade, so your wife would be out of luck.

A lesson from this is that if there is only one R seat left (i.e. only one person can be upgraded at the 7/4/2 window when you call in), you want to upgrade the person with low/no status ahead of time and take your chances as an SE playing Aerolotto.