The reservations agents are going by the rules they have in front of them, which state that only 1 companion may be upgraded. They have no idea of how things work at check-in, or how things work at the gate.

At the gate, things tend to get a little more lenient. A friendly agent is not unlikely to let you upgrade 2 others using your 500-milers. People regularly report being able to bend the rules this way, even for friends not flying with them on the same flight.